Nortel Bolsters HDX Case
Terms of Nortel's latest deal with the Chinese carrier weren't disclosed; but by the middle of this year, the company claims, two optical rings in a 5,000km network encompassing more than 10 cities in eastern and southeastern China will be operational. The carrier also will use Nortel's OPTera Long Haul 1600 and OPTera Connect DX optical switch for optical broadband services, the vendor says. Nortel has done business with China Netcom for several years.
The news marks the third HDX Connect installation Nortel's gone public about, and following on the heels of the company's upbeat earnings announcement last week (see Nortel Earnings Are Upbeat), it invites two trains of thought: First, that Nortel's turned a corner with the late-blooming HDX; and second, that Nortel's bolstering revenues by gaining coveted ground against other vendors in China.
Surprisingly, Nortel's not really encouraging this kind of thinking. "We've always seen interest in the HDX," says Brian McFadden, president of Nortel Optical Networks. "We're seeing that interest continue... There's significant demand in Asia, growth is there... [Overall] I think the market's stabilized, but there's no significant upturn. We're just trying to get our fair share of what's there now... I don't think folk should read more into it than that."
McFadden wouldn't comment on rumors that the HDX is in late stages of testing at Bell Canada (NYSE/Toronto: BCE), where Nortel employees have stated the HDX was in early trials. "We're engaged in several trials around the world," he says, "with people looking hard at optical networks and bandwidth management."
The sale does breathe some new life into the HDX effort. For over two years, Nortel's made no secret of its high hopes that the HDX would help it win business (see Nortel's Got a Plan and On the Job – With Mumford & Pals ). The product's official unveiling last March met lukewarm response, leading observers to worry whether Nortel's ambitions were misplaced (see Nortel's HDX is Here and Nortel's HDX: The Future Under Fire ). The company's announcement of just two contracts for the switch didn't really change this perception (see Nortel Touches America and Optus Selects Nortel).
At least one analyst thinks the Chinese deal shows the HDX isn't getting buried or in danger of being shelved. "Nortel seems to have caught up in RFPs with other OEO switches," says Brian Van Steen, senior analyst at PointEast Research LLC.
Indeed, this win seems to have taken place against rivals such as Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Ciena Corp. (Nasdaq: CIEN), Lucent Technologies Inc. (NYSE: LU), and Siemens AG (NYSE: SI; Frankfurt: SIE) -- which are all bidding big in China. That Nortel won the job could signal it's overcome some earlier obstacles, either technical or related to pricing, two of the early HDX bugaboos.
Significantly, McFadden says Nortel didn't provide any vendor financing for the Netcom deal. "We aren't doing that anymore," he quips.
Is the deal a sign of Nortel's newfound dominance in the Asian market? This one's tough to gauge. Nortel's definitely aiming for lots of China business, as indicated in ongoing announcements (see Nortel to Build Chinese Backbones, China Mobile Picks Nortel, and Nortel Expands China Contract). Still, in its earnings report last week, Nortel didn't break out its earnings in the Asia/Pacific region, indicating instead that these earnings are part of the "other regions" (besides the U.S., Europe/Middle East/Africa, and Canada) that comprised about 18 percent of Nortel's 2002 revenues. What's more, the "other regions" sales were down 46 percent last year, more than any other regions tracked.
Even if sales go up in China this year, that may not correlate to high dollar figures. Analysts have warned recently that placing too much hope in China wins may be a mistake for investors, since margins and pricing are significantly lower there (see Is a Bubble Building in Asia?).
Bottom line? Perhaps McFadden's right, and any enthusiasm about Nortel's news should be tempered with caution. Then again, as Van Steen says, "Any contract in this market is good news." Whether it's really good news, or news of any significant impact, remains to be seen.
— Mary Jander, Senior Editor, Light Reading