Ethernet equipment

Nortel CEO Sees 2008 Growth

Nortel Networks Ltd. CEO Mike Zafirovski says his company has turned a corner and is on course to increase its full-year revenues in 2008.

Talking on today's third-quarter earnings conference call, Zafirovski initially stated that Nortel wouldn't provide any financial guidance for 2008, saying only that this year's revenues are set to be slightly below 2006's $11.4 billion. (See Nortel Edges Into Profit.)

But when asked whether 2008's revenues might fall year-on-year, he stated: "We don't see a scenario where revenues will be down in 2008 compared with 2007. Growth in the mid single digits is the minimum we're looking at -- we're still budgeting, but we're not expecting to go backwards. We are positioned well for modest growth in 2008."

That should put Nortel's 2008 revenues at somewhere around $11.5 billion to $11.6 billion, in line with averaged analyst expectations of $11.53 billion.

That news, and indications that Nortel's efficiency drives are starting to positively affect the vendor's margins, sent its stock up by 12 percent today to $18.25. That's near the low end of the stock's performance in the past year, though -- its 12-month range is $15.32 to $31.79, with that peak reached in March this year.

The company's efficiency measures, which have been particularly successful in driving down procurement and other product development costs, have helped to improve the company's operating margins, which came in at 5 percent in the third quarter, the highest since 2004.

Divisional breakdown
Nortel also provided operating margin details for each of its divisions. Carrier Networks, which generated revenues of nearly $1.1 billion in the quarter, about 40 percent of the vendor's total sales, managed an operating margin of 15.6 percent.

The Enterprise Solutions division, with revenues of $671 million, had an operating margin of just 1.6 percent, while Global Services came in at 19.4 percent with revenues of $540 million. Both of these groups improved their margins as a result of "productivity improvements," noted the CEO.

Bottom of the margin pile, though, is Nortel's Metro Ethernet networks division, which houses the vendor's optical, ATM, and Ethernet products. Its third-quarter operating margin was just 0.6 percent, with revenues at $360 million.

What's dragging this division down is the increasing price competition in the optical sector and increased investment in next-generation optical and carrier Ethernet, specifically 40G and 100G optical and Provider Backbone Transport (PBT) Ethernet developments. (See Nortel Says 40-Gbit PBT Coming Soon.)

Zafirovski says Nortel now has 30 customers for its Carrier Ethernet products -- PBB (provider backbone bridging) and PBT -- and that, having snared BT Group plc (NYSE: BT; London: BTA) as an initial big-name PBT customer, "we expect more Tier 1" business, with revenues "exploding in 2008" from a very low, but unspecified, current base. (See Nortel Lands More PBT Action, BT Pressures Vendors Over PBT, and Nortel, Siemens Win PBT Deals at BT.)

Geographic breakdown
North America is still Nortel's biggest sales driver, generating $1.36 billion, or about 50 percent, of third-quarter revenues, though that's an 11 percent decline compared with last year's third quarter.

The EMEA (Europe, Middle East, and Africa) region is also down year on year, with revenues of $665 million coming in at 19 percent lower than last year.

Revenues from Asia/Pacific, at $537 million, are up 24 percent compared with the third quarter of 2006, driven largely by significant sales gains from enterprise products, while CALA (Central and Latin America) revenues are also growing, up 2 percent to $140 million. Zafirovski noted that Nortel is experiencing "outstanding traction" in India, and has won a WiMax deal in Taiwan. (See Mumbai Airport Uses PBT, Nortel Opens India Center, and Nortel Wins in Taiwan.)

Hungry like the wolf
With much of Nortel's financial shenanigans now behind it, and a settlement reached with the Securities and Exchange Commission (SEC) , Zafirovski is fired up for 2008. (See Nortel Does Deal with SEC.)

He said the company's R&D bets in areas such as next-generation optical, carrier Ethernet, enterprise systems, and WiMax are paying off. "Some people still say we only have legacy business, and I take exception to that."

But that doesn't mean he'll jump at any deal at any price. "We're hungry for business," but Nortel will "walk away from anything that has a negative gross margin," said the CEO, adding that such deals were up for grabs in the GSM infrastructure business at the end of 2006 and early this year.

But while the market is "still very tough," Nortel is seeing "increased levels of sensibilities," in terms of pricing, "and we hope that continues." Certainly the recent price wars have taken their toll among the major vendors. (See Profit Warning Slams Ericsson , NSN Improves, Confirms Extra Cuts, and AlcaLu Cuts 2007 Outlook by $1.25B.)

— Ray Le Maistre, International News Editor, Light Reading

trzwuip 12/5/2012 | 2:59:13 PM
re: Nortel CEO Sees 2008 Growth I believe the #1 weakness of NT and Lucatel is a weak IT infrastructure relative to competitors like Cisco. I believe that both NT and Lucatel still have large staffs that manually input orders while Cisco has customers order online themselves in many cases. It still takes way too long for the old dogs to place orders, fill orders and this also introduces many opportunities for errors. The automation also has Cisco rolling up its books quickly, something the others are also weak in. Hell, NT could do its books for months! NT and Lucatel have opportunities to significantly improve margins if they can move into the modern ages!
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