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%
Source: Nortel

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%
Source: Nortel

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
Source: Nortel

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

inauniversefarfaraway 12/5/2012 | 3:27:28 PM
re: Crunch Time for Nortel You can't help but wonder if the mandarins in Nortel will stop at nothing to get the company out of the stranger's hands? Would they push the cart off the cliff if they can't have it?

In any case, Z is in for quite a ride.

Also wondering to what extent the Machiavellian halls of Nortel are dominated by the pension idiots... Are these guys just ticking off the days to retirement thinking there will still be a pension for them if the company vanishes? Have they not learned the lessons of history?

Imagine Nortel as a company promoting the backstabbers for eons as one of the cozy duopoly of the NA telecom world. These folks saturate that entire fat cat swath and are immovable. Can't retire their asses because they are too large a liability and Nortel can't kill 'em, as they say (mod on True Lies line).

So what happens but the endless and comical soapbox. They probably always fire the folks that aren't completely usless because of the entrenched pensionners. Basically, you're poorest intellectual assets are the only things that are bolted down.

Stagnation is the only possible result.

What does it say about a company when it is trying to save the cancer by selling the most profitable division? What are they trying to save? It embodies the "sacrifice" that is life at Nortel, become productive and profitable so that we may sell you at a loss.

It's a great show, grotesque, bizarre, pathetic, endearing. What will the next chapter hold? A guess is impossible. Maybe they need a government bailout, clean house in there, put the numnuts out to pasture. Usually, that is what those types want anyway.

What is relatively certain is that Nortel is already self-poisoined from an acquisition standpoint. The cancer would quickly cripple the host. Unfortunately, it is not a quick death, but instead an endless succession of death rattles and gasps. The hapless host would also turn into a zombie.

The show must go on!
waverunner 12/5/2012 | 3:27:25 PM
re: Crunch Time for Nortel Two more years and Z is set up nicely with a 500K/yr pension. Boards in the tank, boards in the tank!
Sign In