Optical/IP Networks

Marconi CEO Takes Stock

Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) today held a press conference in which it announced preliminary results for its fourth quarter and its financial year ended March 31. It also confirmed that it had signed a distribution and joint development agreement with Huawei Technologies Co. Ltd. (see Marconi Reports Preliminary Results and Marconi, Huawei Sign Agreement).

The results themselves are a bit of a yawn, and the Huawei deal is old news. But the big draw of the day appeared to be hearing CEO Mike Parton field questions about Marconi's recent BT Group plc (NYSE: BT; London: BTA) debacle.

Marconi investors were shocked by the firm's failure to get a piece of business with BT's massive 21st Century Network (21CN) project, which entails overhauling the service provider's entire network. On the news, Marconi's share price lost half its value (see Marconi in Turmoil). Parton, in responding to questions, implied that Marconi executives had underestimated the importance that pricing had in the bidding for BT's 21CN business (see BT's 21CN Deals: Booty or Bloody? ).

Here are some of the highlights of the press conference:

  • Parton said Marconi really was surprised by BT’s announcement of preferred suppliers and the importance that price played in the selection process (see BT Unveils 21CN Suppliers).

    "There was very little feedback on price" during discussions with BT. Vendors submitted sealed bids and there was a cycle or two of "everyone being told they were too expensive" and being asked to resubmit bids. Marconi reduced its price to the point where it would have only broken even on the deal, according to Parton. It had no idea how its price compared with others until BT made its announcement.

  • Parton says Marconi didn't mislead investors about the company's prospects on the 21CN project.

    However, some investors appeared to be misled; just prior to BT's announcement, Dresdner Kleinwort Wasserstein issued a note saying Marconi would be a big winner and its shareprice would jump upwards (see Analyst: Marconi in Line for 21CN ). In fact, the reverse happened and Marconi’s shareprice crashed (see BT Shuns Marconi for 21CN).

  • BT’s decision not to dual-source its softswitches was another surprise for Marconi.

    Parton noted that BT had named two or three preferred suppliers for other classes of equipment in its 21CN project but gave the softswitch contract -- its "I-Nodes" -- to Ericsson AB (Nasdaq: ERICY) alone (see BT Picks Ericsson for 21CN).

    Marconi had assumed there would be at least two suppliers. It could have submitted a lower price if it had known that the contract value might be double in size, Parton said. He acknowledged that Ericsson was in the same boat and might also have reduced its price if it had known it was the sole supplier. Parton said that Marconi had gone back to BT to discuss the issue of having a second softswitch supplier. However, it's become clear that Ericsson will bring in partners of its own (see Ericsson to Bring Partners to 21CN Party).

  • Marconi believes not winning any 21CN work is a setback, but it's not devastating.

    Marconi says BT accounted for 25 percent of its revenues for the financial year ending March 31, and more than half of that (£173 million or US$317 million) came from services. Table 1: Marconi's FY05 Revenues From BT
    Category of Business FY05 Revenues in �M
    Services 173
    Optical Equipment 88
    Broadband Access 13
    Legacy Access 48
    Source: Marconi

    Parton pointed out that other revenue streams would have been reduced even if it had won some 21CN work. For instance, its £88 million ($162 million) 2005 revenues for supplying BT with optical equipment would probably have been split between two suppliers, and that could have been reduced because of price erosion. Thus the loss of 21CN work in this product category probably equated to about £30 million ($55 million). It was going to lose £58 million anyhow.

  • Parton and pals face a tricky issue over performance bonuses.

    When Marconi was restructured, 9 percent of the equity was reserved for management performance bonuses, based on five milestones. The fourth of these milestones was triggered by Marconi's valuation reaching £1 billion ($1.84 billion) and remaining above this figure for 90 days. That has been achieved, but the 21CN debacle resulted in Marconi's valuation halving to £500 million. At today's shareprice of 273 pence, the company is worth £555 million ($1.02 billion).

    Parton dodged questions on whether he would exercise the options triggered by this milestone. He will be free to do so from next November.

  • Marconi's future remains up in the air.

    Parton wouldn't elaborate on Marconi's previously announced plans to "pursue all strategic options" -- including finding a buyer -- following the 21CN announcement (see Marconi to 'Pursue All Strategic Options'). However, he said he didn't favor selling off Marconi's broadband router/switch (BBRS) division, saying that would encourage a more general breakup of the company, which was worth more as a single entity in his view.

    Parton waffled a bit on how Marconi would respond to the acquisition of Laurel Networks Inc. by ECI Telecom Ltd. (Nasdaq/NM: ECIL). (See ECI to Buy Laurel for $88M and ECI Draws Up New Dance Card.) He said he had yet to talk to ECI about Marconi's existing partnership with Laurel and noted that Huawei had plenty of broadband remote access servers itself. Whether these are equivalent to Laurel's remains to be seen.

    — Peter Heywood, Founding Editor, Light Reading

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