Crunch Time for Nortel

The North American carrier capex crunch is hitting Nortel where it hurts as the vendor's service provider customers turn down demand

November 10, 2008

6 Min Read
Crunch Time for Nortel

If Light Reading ever decides to identify its most understated headline ever, we wouldn't need to look any further than this candidate from January 10, 2006 –- Nortel's New Faces Face Tough Task.

Tough task? That's not even the half of it. Nortel Networks Ltd. CEO Mike Zafirovski, who took the job late in 2005, must be wondering whether he'll ever see business blue skies again, or whether it's dark clouds all the way to the exit door.

The "Zed Man" himself summed up the scale of his current challenge today when he told investors and analysts on the third quarter conference call that his team's main focus now is "running the company to survive and prosper."

He didn't put any emphasis on "survive," but that's where it lies at the moment.

The main cause of Nortel's pain is its carrier customers, specifically those in North America that have tightened their purse strings during 2008, a process exacerbated by the self-destruction of the global economy.

The impact of those capex decisions are evident in Nortel's third quarter numbers, released today. The headline figure shows a scary net loss of $3.4 billion, nearly all of which comprises non-cash balance sheet changes: Its operating margin -- the financials of its day-to-day operations before any charges and costs -- was just $17 million on revenues of $2.3 billion. (See Nortel Culls 1,300 Jobs, Loses $3.4B.)

It's in the details of the business division sales numbers that the extent of the capex crunch can be seen. The table below shows how Nortel's Carrier Networks business has seen its sales slump by nearly a quarter in the past year to $822 million, while other divisions fared better but still reported reduced revenues.

Table 1: Crunch Time: Nortel Q3 2008 Revenues by Division

Revenues in $ millions

Q3 2008

Q2 2008

Q3 2007

% change year on year

Carrier Networks

822

1,038

1,080

-24%

Enterprise Solutions

616

610

671

-8%

Global Services

507

536

540

-6%

Metro Ethernet Networks

317

378

360

-12%

Other

57

60

54

+6%

Total revenues

2,319

2,622

2,705

-14%





Digging deeper into the Carrier Networks unit, CDMA infrastructure is clearly a major concern, despite Nortel's efforts to make things seem better by today announcing a new deal (no value was announced) with China Telecom Corp. Ltd. (NYSE: CHA). (See Nortel Wins CDMA Deal.)

The fact is, CDMA revenues, at $423 million, are down by more than 28 percent from a year ago. GSM sales, at $297 million, are also down, by 13 percent, while revenues from the Carrier Networks division’s voice-related equipment unit, called Circuit and Packet Voice Solutions (which includes TDM switches), fell 29 percent, though that unit’s sales are always expected to decline as demand for legacy gear continues to wane. (See table below.)

Table 2: Carrier Networks Division in Decline

Carrier Networks revenues in millions $

Q3 2008

Q2 2008

Q3 2007

% change year on year

CDMA Solutions

423

446

592

-28%

GSM and UMTS Solutions

297

448

341

-13%

Circuit and Packet Voice Solutions

102

144

147

-29%

Total

822

1,038

1,080

-24%





And it's not just North American carrier capex constraints that are impacting Nortel's numbers: As the table below shows, revenues from Europe and Asia/Pacific are also down, with the Caribbean and Latin America (CALA) the only region to show year-on-year sales growth.

Table 3: Nortel Q3 Revenues by Region

Revenues in millions $

Q3 2008

Q2 2008

Q3 2007

United States

945

1,039

1,159

EMEA

576

634

665

Canada

140

200

204

Asia/Pacific

505

584

537

CALA

153

165

140

Total

2,319

2,622

2,705





The pain is set to continue. Nortel's CFO Pavi Binning noted that the prevailing economic conditions impacting Nortel's business are "deteriorating."

MEN at work
The operators are also the main customers for Nortel's Metro Ethernet Networks (MEN) division, which houses the vendor's optical and carrier Ethernet gear (and which is up for sale), and the Global Services division, which is being disbanded as of Jan. 1, 2009, with staff and accountability divided between the company's remaining three divisions. (For full details, see page 2 of Nortel Culls 1,300 Jobs, Loses $3.4B.)

Zafirovski declined to discuss the planned sale of the MEN business, saying only that Nortel was in talks with a number of parties regarding the potential sale. (See Nortel to Sell Carrier Ethernet, Optical Biz and Huawei Seen as Likely Nortel Suitor.)

He did note, though, that the MEN division has a book-to bill ratio (the value of sales on the order book compared to those on the balance sheet) was a strong 1.08 –- strong, that is compared with the 0.87 book-to-bill ratio for the whole of Nortel.

The CEO also noted that MEN, while hit by North American carrier capex decisions, was doing well with its long-haul DWDM products, especially the 40 Gbit/s gear, which now has more than 30 customers.

That didn't stop the division reporting revenues down nearly 12 percent year-on-year at $317 million and a third quarter operating loss of $18 million.

Global Services, meanwhile, saw its sales fall year-on-year by 6.1 percent to $507 million, while the Enterprise Solutions unit reported revenues of $616 million, down 8.2 percent from a year ago.

Nortel's share price is down by $0.20, or 17 percent, to $0.97, giving the company a market capitalization of $487 million. A year ago the vendor's stock was worth $18.37. Zafirovski and Binning could be feeling somewhat lonely just now.

— Ray Le Maistre, International News Editor, Light Reading

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