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Nortel to Sell Carrier Ethernet, Optical Biz

Ray Le Maistre
9/17/2008

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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digits
digits
12/5/2012 | 3:32:04 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
What sort of price could Nortel get for the MEN division?
Its annual revenues are on course to be around $1.5 billion, and it looks like it could swing either way in terms of operating margins.

And who might buy it? Any takers?

Ray
mtb826
mtb826
12/5/2012 | 3:32:03 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
I think your editors are asleep at the wheel. The phrase:
G«£...where it has pushed hard to establish PBT (Provider Backbone Transport) as a viable technologyG«™G«•

Should read:
G«£...where it has pushed hard, but failed to establish PBT (Provider Backbone Transport) as a viable technologyG«™G«•
ProductMan
ProductMan
12/5/2012 | 3:32:03 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
DP-QPSK is a worthwhile technology in the short-medium term for 40G and possibly some of the 100G advances as Nortel have patent on the technology. Some of the Metro Ethernet features around have strong merits in them.

As for what it is worth; it has to be worth taking seriously with the customer base, sales channels, experienced R&D etc etc.

Buyers will be cautious at the task of integrating some of the features into an existing product lines.

A medium sized vendor probably could take the MEN products on if they can finance, or perhaps with VC cash.

Is the offering differentiated enough for a major Vendor ?

Asking what it is worth is hard unless more about the sale is understood, but for someone who has worked at Nortel in the boom days, it is a little sad to see this happening, but vendors are in a hell of a competitive market at present and probably for the near to medium term.

ProdMan
ProductMan
ProductMan
12/5/2012 | 3:32:02 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
Thats a little harsh mtb826! Given the status of the standard, operators were always going to be cautious.

Nortel seemed a little ahead in PBT, but time will tell. Unfortunately, time that Nortel feel they have run out of.

ProductMan
USA
USA
12/5/2012 | 3:32:02 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
The MEN business may have value, but I can't see anyone wanting the optical business. Their current product set has been around a long time and is dated. The proprietary 40G modulation technique will always be too expensive because it isn't mainstream and they won't have the critical mass to see the price declines as the industry leverages common volume parts
hyperunner
hyperunner
12/5/2012 | 3:32:01 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
My 2 cents...

NTs DP-QPSK implementation seems to work well enough, but I'm not sure how valuable or unique it is. We've seen at least three other vendor pitches claiming they're doing, or will do the same. And it's not like most people are in a hrry to implement 40G - we'll probably wait for 100G. Also Nortel's board is hellish bulky and seems to be a power hog. OK, before you flame me I know it's basically a prototype, but I guess they have a lot of work to do to turn it into a production system.

Nortel's dispersion compensation technology. That's pretty impressive. And I think they make the ASICs for it, as well as having patents. I think that has real value.

PBT. Well, we've talked about it a lot on these boards. I'm not a fan - it's one technology too many in my book. But let's put that aside. There's no IPR around PBT - it's supposed to be a standard (right!). So anyone can do PBT, and most of Nortel's competitors have much better platforms and a lot better track record with packet technology than Nortel. Let's face it - how many packet platform projects did Nortel sh*tcan in the past ten years - including stuff they acquired? As a service provider I wouldn't buy a packet platform from Nortel because I'd never know if I could still buy it from them next year. And that's when Nortel owned it - it goes double if they're selling off the division - literally any of the current products could be terminated.

hR.
abashford
abashford
12/5/2012 | 3:32:01 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz

>I think your editors are asleep at the wheel. The phrase:
>G«£...where it has pushed hard to establish PBT (Provider Backbone >Transport) as a viable technologyG«™G«•

>Should read:
>G«£...where it has pushed hard, but failed to establish PBT (Provider >Backbone Transport) as a viable technologyG«™G«•

Unlike you, editors have to worry about being factual.
abashford
abashford
12/5/2012 | 3:32:00 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
http://telephonyonline.com/eth...

Why does Fujitsu bother then? And before you go and 'correct' me... PBB-TE = PBT
davallan
davallan
12/5/2012 | 3:32:00 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
viable = "capable of life"

I'm afraid the "genetically modified" ethernet genie is already out of the bottle....

... and current attempts to clone PBT are a more appropriate target for the term "white elephant" esp. from the point of view of "bloat"

D
mtb826
mtb826
12/5/2012 | 3:32:00 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz
Abashford,

The orginal quote calls it a "viable technology". Point to the facts that back that up? There doesn't appear to be any service providers that are in that camp. NT punting on their golden child is further evidence that this White Elephant is dead.
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