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Nortel: No Mercy

Nortel Networks Corp. (NYSE/Toronto: NT) has suffered several setbacks lately, but today it reported two pieces of positive news.

In the first of two press releases this morning, Nortel announced that it had settled its patent infringement lawsuit with Ethernet switch maker Extreme Networks Inc. (Nasdaq: EXTR) (see Nortel Settles With Extreme). In the second, it announced that it has won a new contract for the Passport multiservice switch family (see Syringa Picks Nortel Passport).

While the company’s stock closed up $0.09 (20%) to $0.54 a share today, most analysts were unimpressed by the news.

“Restructuring its balance sheet is critical. Any new business at this point is irrelevant,” says Edward Jackson, an analyst with U.S. Bancorp Piper Jaffray.

The new contract announced today is with Syringa Networks, a consortium of 12 independent service providers in rural Idaho, for its Passport multiservice switches. The network buildout, which was begun in 2001, will span 1,419 miles and provide broadband access to more than 40,000 customers throughout Idaho and Wyoming, when it’s completed at the end of this year.

Syringa Networks is using the Passport switches for its ATM backbone and has already deployed several Passport 15000-VSS multiservice switches. It plans to deploy several more Passport 15000-VSS devices in the coming months to better serve its residential, business, and government customers.

The actual dollar amount of the contract was not revealed in the press release, but based on the fact that the entire network buildout was worth an estimated $40 million when it was first announced, this contract is likely worth only a few million dollars at best -- a drop in the bucket, considering Nortel is expected to bring in over $2 billion in revenue for the third quarter.

“To be honest, I didn’t give it a lot of attention,” says Timothy Bechter, an analyst with Legg Mason Inc.. “How much could a consortium in Idaho actually bring in? Not enough to make much of a difference.”

Nortel also announced that its patent infringement lawsuit against Extreme has been settled and dismissed in the U.S. District Court of Massachusetts. The two companies have agreed to a cross-licensing deal, details of which were not disclosed.

Nortel originally filed the suit back in March 2001, accusing Extreme of violating six patents, which appear to be related to multiservice metro switching. Nortel had asked for $150 million in damages. Extreme countersued in May 2001, denying all charges.

While specific details of the agreement have been kept under wraps, in a telephone interview this afternoon Extreme's CEO, Gordon Stitt, said that the suit will have "no material impact on" the company. According to the agreement, Extreme will license the Nortel patents for five years. The company will be required to make small royalty payments to Nortel. Nortel will also license some of Extreme's technology for the next five years.

Jackson of U.S. Bancorp Piper Jaffray, who covers Nortel and Extreme, says that both companies have more pressing matters to deal with. Both have preannounced lower-than-expected earnings for the quarter that ended in September (see Extreme Reports Preliminary Q1 and Nortel Lowers Q3 Forecast).

“We saw a general softness across all regional areas,” says Stitt. “I’d like to think things can’t get any worse, but I don’t have enough information to call a bottom at this point. Luckily for us, the enterprise business isn’t going through the same restructuring that many of the service providers are going through. Hopefully, with a little economic recovery, things can stabilize."

Nortel announced last week that it would fall short of its revenue goals for the third quarter. This was the second time it lowered expectations in the past two months. The company now says it expects to report around $2.3 billion for the third quarter, down 15 percent from last quarter’s revenues. It also announced last week that it would be closing its Coretek business and laying off more workers (see Coretek Is Closed and Nortel Outlook Worsens). It bought Coretek for $1.4 billion in stock in March 2000.

And if things weren’t already bad enough for Nortel, SBC Communications Inc., a major Nortel customer, announced it would cutting its capital spending budget for 2003 -- again (see SBC Cuts Capex, Jobs). All the recent bad news has left many analysts questioning Nortel’s viability.

“I’m not saying that they will go bankrupt for sure,” says Jackson. “But the risk of bankruptcy is very real. It’s not a farfetched idea, anymore.”

Jackson downgraded the company’s stock last week to market underperform. But other analysts say Nortel will likely weather the storm without having to resort to bankruptcy protection. They point to the $4.8 billion in cash the company has on hand. They claim that even with sagging sales the company should have enough to last another 15 months.

— Marguerite Reardon, Senior Editor, Light Reading
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lilgatsby 12/4/2012 | 9:39:44 PM
re: Nortel: No Mercy As it seems every other headline today is very, VERY negative to the tune of bankruptcy, lay-offs, indictments, etc; these aren't really terrible announcements.

The NT - Extreme suit always seemed like nothing more than background noise. No big deal.

The Syringa deal is a joke, but it's still a sale. Just remember these are the same techno-wizards that bought the first Movaz long-haul products...a deal which Nortel among other more qualified vendors were not selected. BTW, it was a $40m project...that included the building of huts, fiber going across farms, streams and potato patches, etc...the long-haul gear was only around $3m over a 2-year installation contract. I would estimate the switch sale to be 1/2 to 1/3 of the long-haul. But again, in the eyes of this beholder it is a sale...

whyiswhy 12/4/2012 | 9:39:40 PM
re: Nortel: No Mercy Given the high rate of low interest equipment financing they did and continue to do...and given the bankruptcies of many of the major LH carriers (their major customers), NT management would be dead in the head not to consider it as a viable business strategy going forward.

The bankruptcy avalanche effect will eventually extend from top to bottom of the Telecom food chain.
StartUpGuy1 12/4/2012 | 9:39:38 PM
re: Nortel: No Mercy Look at Marconi... They are coming out with very little debt, money in the bank, and all of the managers that created the disaster all still have their jobs after they wacked 20,000+ employees. And the stockholders are left with 1% of the company and the banks/bondholders have 99%.

It is not right, but it is in within the law. Nortel/Lucent could do the same thing and come out of it in a much better position to hurt Cisco because they have been forgiven through bankruptcy all of their mistakes.

The only people that get the shaft are the employees and the stockholders...
beowulf888 12/4/2012 | 9:39:36 PM
re: Nortel: No Mercy Well, a bankruptcy by NT would produce much larger shockwaves than Marconi -- especially in North America. After all NT is a much larger company than Marconi.

As for being in a better position to hurt Cisco after a bankruptcy -- well, if they couldn't hurt Cisco during the boom I doubt if they could during the downturn.

BobbyMax 12/4/2012 | 9:39:33 PM
re: Nortel: No Mercy It is hard to trust the wallstreet analysts regarding Northern Telecom. These analysts just distract the company from focusing on reconstruction strategy.

Nortel is a primary telecom equipment supplier in the world. Recently its management made a lot of mistakes in terms of granting stock options and unreasonable severance pay. Its past CEOs did not have a sound business plan and growth strategy. Almost every thing was happeninmg on the fly.

Its acquisition of certain California companies prove suicidal to the company.
Belzebutt 12/4/2012 | 9:39:30 PM
re: Nortel: No Mercy Its acquisition of certain California companies prove suicidal to the company.

Amen to that.
opticalwatcher 12/4/2012 | 9:39:28 PM
re: Nortel: No Mercy Actually, the world needs a reprieve from analyst as well as every would-be journalist that appears to be focused on every piece of bad information as if its the end of the world. (This, and I'm being sincere, is not my opinion of the articles on lightreading). Its merely an observation. I've been invested in the stock market since 1991, since the end of the last little market correction and economic downturn. One thing is consistent - the more journalist and analyst cry, the more you should buy. The more journalist and analyst pump, the more you should dump. That seem to be a fact, rather than a silly little saying. Truth is, analyst are interested in companies, they are only interested in getting your money. The rest is merely window dressing. In other words, it doesnt matter what they sell you, just as long as they can sell you. So, right now the pimps are selling bad news, so, we buy bad news everyday. Is the world going to end? probably not. Are we going to turn into Japan and take on the deflationary spiral? probably not. why? simply because when the enron's are dead, our government doenst prop them up. When the worldcom's are dying, our government doesnt come in with money to protect their interests. Bad things die. That's nature, and that's what will keep our economy on track. Does Lu or NT deserve to live? maybe and maybe not. But one thing is for sure, no damn analyst can tell you either way. Only the rules of economics and the simple supply/demand food chain will determine that outcome. And frankly, any of us can throw a dart at the board and come to a conclusion just as easily and just as sophisticated as some putz analyst.

Reprieve? yep, we all need a reprieve!
B2Itried 12/4/2012 | 9:39:19 PM
re: Nortel: No Mercy I agree NT is the primary telecom equipment supplier etc....

Acquisitions is just a small part of the puzzle. It's that extra financing hand-outs also rank up there.

If only analysts would leave NT alone. I for one am tired of hearing chit from this now soap opera tv bashing, bussiness reports etc. It affects even those workers who are left on the boat.


whyiswhy 12/4/2012 | 9:39:17 PM
re: Nortel: No Mercy NT is a great company, poorly run. NTs biggest problem today is they are carrying the debt of the purchases they financed and declared as profitable. Carrying it as if it was good debt. When those financed customers declare bankruptcy, their debt has to be written off, and earnings re-stated. Double whammy.

NT massively financed sales to get market share, declare profits for management bonuses, and raise their stock value. An orgy of excess greed.

Greed and the punishment of its excess are the Yin and Yang of capitalism.

ip-eng 12/4/2012 | 9:39:16 PM
re: Nortel: No Mercy NT has yet to learn to clean house like Cisco does and yet to figure out how to get more out of fewer (and the right quality) engineers.
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