Nortel to Sell Carrier Ethernet, Optical Biz

Nortel issues a profits warning, plans further cost cutting, and announces plans to sell its Metro Ethernet Networks division

September 17, 2008

4 Min Read
Nortel to Sell Carrier Ethernet, Optical Biz

Nortel Networks Ltd. is to quit the optical and carrier Ethernet markets, the company announced today.

Nortel says it is to undergo a significant revamp in the coming months, part of which will be an attempt to sell its Metro Ethernet Networks (MEN) division, which supplies optical and Ethernet equipment to carriers and cable operators. (See Nortel Rolls On With 40-Gig, Nortel Wins PBB Deal With Verizon, Virgin Deploys 40-Gig, Nortel Intros 40 Gig, 100 Gig, and Comcast, Nortel Put 100G to the Test .)

The news, a further indication that the company sees its future primarily as an enterprise technology provider, came hand-in-hand with a profits warning and plans for further cost reductions, in addition to the cuts announced earlier this year. (See Nortel Slashes 2,100 Jobs.)

In a statement released shortly after 6 a.m. (Eastern), Nortel's CEO Mike Zafirovski noted: "It is clear that the business environment in which we operate requires additional immediate and decisive actions... A comprehensive review of our business is taking place and we are determined to reshape the Company to maximize its competitiveness, drive a significant increase in effectiveness and efficiency company-wide, and re-focus to establish a clear path for growth, profitability and renewed shareholder value."

That review includes planning for as yet unspecified additional restructuring and cost-cutting measures that will result in a "more competitive business structure," and moves to mitigate the risks associated with Nortel's planned 4G wireless investments. (See Nortel Flunks WiMax and Zafirovski: We'll Get 4G Right.)

The restructuring also includes the intended sale of the MEN business, which Nortel describes as a "premium asset with a highly differentiated offering." (See Nortel Aims for Ethernet Profits.)

So why sell? Because the market, which is populated by the likes of Alcatel-Lucent (NYSE: ALU), Ciena Corp. (NYSE: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), ECI Telecom Ltd. , Ericsson AB (Nasdaq: ERIC), Fujitsu Ltd. (Tokyo: 6702; London: FUJ; OTC: FJTSY), Huawei Technologies Co. Ltd. , Juniper Networks Inc. (NYSE: JNPR), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and many others, is just too competitive. Zafirovski has long said he is only interested, long term, in markets where Nortel can be a market leader and make money. (See Nortel CEO Maps Out His Vision.)

While it might be regarded as one of the leading players in the optical and carrier Ethernet equipment markets, where it has pushed hard to establish PBT (Provider Backbone Transport) as a viable technology, Nortel has struggled to make money from the division. (See Infonetics Reports on Optical, Nortel: There's More to PBT Than BT, and A Guide to PBT/PBB-TE.)

In the second quarter of this year, the MEN division reported revenues of $378 million, up 4 percent year on year and up 16 percent sequentially. The division's operating margin for that quarter was 4.5 percent, resulting in an operating profit of $17 million, but for the first half of this year MEN's operating margin was minus 1.1 percent for an operating loss of $7.8 million from revenues of $705 million.

Zafirovski noted: "Monetization of this asset is in line with the further consolidation necessary in the industry and will provide MEN customers and employees with a clear path forward. Throughout the process, Nortel will maintain MEN R&D investments, new product introduction timelines and all customer commitments."

The news came as Nortel announced that the second half of 2008 is to be weaker than expected, forcing the company to revise its revenue estimates.

The current "sustained and expanding economic downturn" means Nortel is "experiencing significant pressure as Carrier customers cut back their capital expenditures further than previously expected and certain Enterprise and Metro Ethernet customers defer new IT and optical investments."

Nortel isn't alone in being hit hard by the current global downturn. (See Ciena CEO: Slowdown Looks Shortlived, Sonus Slumps on Slower Growth Outlook, Cisco: Economic Troubles Aren't Over, and AlcaLu's Q2 Dragged Down by CDMA.) As a result, Nortel now expects its third-quarter revenues to be about $2.3 billion, compared with the $2.66 billion that Wall Street had been expecting.

In addition, Nortel now expects full-year revenues to be down between 2 and 4 percent compared with 2007, with gross margins of 42 percent for the year.

Only six weeks ago Nortel had advised that full-year revenues were on course to grow in the low single digits (between 1 and 3 percent inclusive) and achieve gross margins of 43 percent. (See CDMA, Charges Knock Nortel.)

In 2007, Nortel reported revenues of $10.95 billion. So now, instead of the previously forecast 2008 revenues of between $11.06 billion and $11.28 billion, Nortel is now expecting full-year revenues of between $10.51 billion and $10.73 billion. That represents a potential shortfall of $770 million in terms of anticipated 2008 sales.

On average, financial analysts had, until today, been expecting 2008 revenues of $11.2 billion, so there are some spreadsheet revisions to be done this morning.

Nortel's share price ended Tuesday at $5.30 but is trading down $0.80, more than 15 percent, to $4.50 in pre-market trading this morning.

— Ray Le Maistre, International News Editor, Light Reading

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