Nortel's Z-Man Hints at M&A
Having fended off earnings conference call questions about how Nortel is going to grow in the second half of this year and meet its revenue targets, Zafirovski suggested that acquisitions were a possibility now that the company has a tighter grip on its financials. He cited the purchase of router vendor Tasman Networks (announced December 2005) as an example of how Nortel could add to its portfolio with strategic purchases. (See Nortel Takes Tasman for $100M.)
A spokesman confirmed that Nortel believes it's now in a position, financially, to make such moves, though the company can't talk about any specifics or ongoing negotiations.
Zafirovski, though, has been down this road before, and investors, at the moment, are more concerned about how its current portfolio is performing in what is an increasingly cut-throat market. (See Nortel CEO: We're Ready to Deal, Instant Revamp for Nokia Siemens, and AlcaLu's Russo: We're Under Attack!)
That's because Nortel today announced revenues that missed expectations and reported a small loss instead of the expected small profit. The news sent its stock down $1.25 (5.75%) to $20.49 in trading on Thursday. That gives the Canadian vendor a market cap of about $8.9 billion. (See Nortel Falls Short in Q2.)
Zafirovski, though, is sticking with the company's guidance that it will achieve full-year revenues the same as, or just slightly below, last year's $11.4 billion. To deliver flat year-on-year revenues, Nortel will have to deliver $6.36 billion in revenues in the second half of the year, compared with just more than $5 billion in the first six months. (See Nortel Reports Q1 and Nortel Reports 2Q07.)
The CEO says his company can do it. In the July-to-December timeframe he is expecting growth in CDMA and GSM equipment sales; continued strength from the enterprise business, where the partnership with Microsoft Corp. (Nasdaq: MSFT) has delivered more than 100 contracts to date; and VOIP systems sales that will more than compensate for the decline in traditional voice switch revenues. (See Nortel Sees $1B From Microsoft Alliance.)
He is also forecasting better numbers from the company's Metro Ethernet Networks business, which reported revenues of $363 million, down 16 percent from a year earlier. This is the business unit that houses the controversial PBT (provider backbone transport) flavor of Ethernet that BT Group plc (NYSE: BT; London: BTA) is deploying, but which has otherwise attracted only a number of small deals. (See BT Sells PBT-Based Backhaul Service, Nortel Wins Dakota PBT Contract, PBT Parties On, Nortel Pushes PBT Pact, Frontier Deploys Nortel PBT, PBT: New Kid on the Metro Block, and Nortel on PBT: Today BT, Tomorrow the World!)
The second-quarter dip in that business sector was down to lower sales of long-haul optical and data products, while metro optical and carrier Ethernet revenues were on the rise. Zafirovski says the company is experiencing a "strong trend in carrier Ethernet and optical."
Meanwhile, the company continues to place its bets on upcoming demand for next-generation wireless systems beyond the 3G infrastructure that carriers are now deploying. Nortel announced the sale of its 3G access business in September last year and has consistently talked down the worthiness of 3G technology since, in favor of next-generation, 4G wireless technologies. (See Alcatel Snags Nortel 3G Unit, Zafirovski: We'll Get 4G Right, and Nortel CEO: 3G Can't Cut It.)
"We're investing in 4G, fixed/mobile convergence, applications development, and next-generation transport," said the CEO. "We are making the right investments." (See Chunghwa Uses Nortel WiMax and Nortel Helps Golden.)
— Ray Le Maistre, International News Editor, Light Reading