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VoIP Systems

Nortel's New Faces Face Tough Task

The brass name plate maker at Nortel Networks Ltd. must be working overtime, as new CEO Mike Zafirovski continues to hire more new blood. His latest appointment is Don McKenna, who will be Nortel's VP of global manufacturing services. (See Nortel Appoints New VP.)

McKenna, who joins after 40 years at General Electric Co. (NYSE: GE), joins his former colleague Joel Hackney, who last month joined Nortel as senior VP, Global Supply Chain and Quality, after 14 years at GE. (See Nortel Hires Quality SVP.)

And guess what? Zafirovski worked at GE for 25 years before joining Motorola Inc. (NYSE: MOT) in 2000. So might he hire from Motorola too? No -- that would be against the conditions under which Zafirovski was able to join Nortel in November last year. (See Nortel, Moto Settle on Zafirovski and Nortel Appoints New CEO .)

But Zafirovski hasn't just been hiring from GE: He's been poaching from elsewhere, too, as he revamps the vendor's management. (See Nortel Hires Legal Eagle, Nortel's Clent Came & Went, and McFadden, Spradley out at Nortel.)

McKenna will be part of Hackney's team that will play a major role in increasing efficiencies, lowering procurement costs, and improving operating margins at Nortel. Improving those margins to the new CEO's target of between 13 percent and 19 percent, from the current low single-digit range, is going to be tough work, according to analysts, who believe Nortel is losing ground to its closest competitors.

In a research note issued this week, analysts at Lehman Brothers note that Nortel's recent share price strength is "largely due to investors' hope that the new chief Mike Zafirovski may be able to turn Nortel around in a short time frame." But they add: "While we are impressed by Zafirovski's track record as an exceptional executive in the industry, we believe turning Nortel around will be a challenging task for anyone and it may take longer than investors are hoping for."

The analysts say Nortel has been "losing ground across multiple markets it competes in, including enterprise and 3G wireless… We believe Nortel's competitive positioning in wireless has significantly worsened over the last 12 months, losing ground at Sprint Corp. (NYSE: S) and Vodafone Group plc (NYSE: VOD) and being shut out from Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) and Cingular Wireless , both who were among Nortel's top customers." (See Cingular Confirms 3G Trio and Telstra Unveils Switch to IP.)

And things haven't been working out for Nortel in the rapidly expanding Indian and Chinese markets, either. (See Nortel Suffers China 3G Setback and Mega BSNL Contract Looms.)

So the Lehman team is waiting for the new CEO's next moves, and wonders whether Zafirovski might even exit some markets. "In our view, it is crucial to see whom Zafirovski can bring in to help him run Nortel… [We] believe that longer term Nortel needs to make up its mind as to which businesses it wants to stay in and which it should get out of. Checks suggest that Nortel has hired an outside consulting firm to evaluate the different options Nortel has."

Nortel declined to comment on whether it is using external consultants for this purpose. A spokesman added: "The new CEO, Mike Zafirovski, is committed to a business transformation process that will generate profitable growth."

Nortel's share price closed at $3.32 Monday, valuing the vendor at $14.4 billion.

— Ray Le Maistre, International News Editor, Light Reading

futureisbright 12/5/2012 | 4:09:53 AM
re: Nortel's New Faces Face Tough Task Optical
money losing; share being eaten by newcomers. Get out.

UMTS
low market share; low margins
Get out

GSM legacy
Cash cow; fixed market share. If UMTS is dumpd, so should GSM.

CDMA
#3 in the market; Positive margins.
Keep and move to #2 with acquisition of MOT or Samsung business

Carrier VoIP
VoIP is taking its sweet time taking off. However, Nortel is still one of the better solutions in the market.
Keep and invest

TDM Carrier legacy
Cash cow; fixed market share; leverage for VoIP.
Keep and milk

Enterprise
Nortel's recurring Year after Year disappointment.
Keep and invest
digits 12/5/2012 | 4:09:53 AM
re: Nortel's New Faces Face Tough Task If Nortel did abandon any particular market -- and this has to be treated as a major *if* -- which should it be -- enterprise, wireless, fixed?
Or would such a move be a mistake, given the ongoing blurring of these market boundaries?
Physical_Layer 12/5/2012 | 4:09:52 AM
re: Nortel's New Faces Face Tough Task future - NT said on their last conf that optical is profitable. Just FYI. Also are you sure they make money in GSM? Lastly, most people say NT is #2 in CDMA so why do you say #3? Just wondering.






materialgirl 12/5/2012 | 4:09:51 AM
re: Nortel's New Faces Face Tough Task Dear Ray:
Get with it! Wireless and wireline are converging. It is effectively one market looking forward.
futureisbright 12/5/2012 | 4:09:46 AM
re: Nortel's New Faces Face Tough Task Is optical profitable? If so my bad.

Is GSM profitable? Yes. Most of the business consists in selling upgrades and extensions to existing contracts. The game there is to keep costs below revenues. Not very hard, even for Nortel.

Is CDMA #2 or #3? A lot of the data is confusing. Especially within Nortel, data is often fudged to climb a rank or two.

My underlying point is that it is widely viewed that a company like Nortel must be #1 or #2 in the segments in which it compete in order to sustain long term competitive advantage and above average profitability. This is supported by much academic research, and has been ruthlessly and most consistently applied by GE over the past 30 years, if not longer.

Therefore I expect that Mr. Z. being an old GE hand, and hiring a bunch of other GE types, is likely to apply the religion he has been brought up in.

And by the way, the #1 or #2 philosophy has been the basis of much Nortel strategic planning over the years although the implementation has left much to be desired. For instance much of the original drive behind Optical and Carrier VoIP was to be in fact #1 in those segments. And around the turn of the century, you could have argued that mission was accomplished for those segments, plus also Enterprise Voice.

At this stage, I am not sure that Optical is #1 in anything meaningful. Market is anemic. NT Innovation has been drained of that segment. Younger optical companies are carving more attractive business. Someone who knows more can comment.

For CDMA, again sorry if I misread the figures. What I see are slippages against Lucent and the Asian competitors. My question for Mr. Z. is, does he want to be #2 or #3 in the #2 category (after GSM/UMTS) in wireless networking? I would think he would prefer to be #1 or #2 in GSM/UMTS. There, for #1, he needs to overtake Ericsson, and for #2, he needs to overtake/acquire NOK. A big mountain to climb. I would be really surprised if he stayed in there.

Should Mr. Z. decide to be #2 in the #2 category (CDMA), he needs to consolidate either through organic growth or acquisition. Funnily, the most likely candidate for acquisition is MOTGÇÖs CDMA business. LU without CDMA would be nothing, so they are an unlikely target. The Koreans (Samsung etc..) have not shown much agility with such restructuring. The Chinese are smelling blood; they are in for the long run. On the other hand MOT has been mulling for years about getting out of this segment.

The challenge would be to take the MOT CDMA business while leaving behind the MOT GSM business. Then maybe Lucent would be interested in acquiring both MOTGÇÖs and NTGÇÖs GSM business?
flipper 12/5/2012 | 4:09:31 AM
re: Nortel's New Faces Face Tough Task Nortel should abandon Enterprise and converge wireline with wireless to focus on a single market.
The last two are converging anyway and they have a strategy for re-using old wireline equipment in the IP world that requires little R&D. Enterprise is too crowded and Nortel are not going to turn the companies fortunes around by discounting the price on their Enterprise product in order to win market share.
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