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Optical/IP

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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abashford 12/5/2012 | 3:31:54 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz >boo..hoo... waaaaaaaaaaaaah.
>(the same could be said of PBT and it's lack of technical merit)

I will assume from your mature response that you must be of the VPLS/MPLS camp.

If that technology is so infallible, I don't understand why so many of the VPLS/MPLS players are now taking advantage of PBB to scale their network edge. I guess there was no problem in the first place?
freetoair 12/5/2012 | 3:31:52 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz K28 makes a good point...

But even broader is the management of the "communication" in the press release - yes they are calling the Qtr down - but the wording in the PR essentially guaranteed the stock would tank (from its already pitiful level) and put a fatal bullet into the company???

Zafirovski has failed and with this poor handling of his own failure - he should go ASAP (although I advocated his departure long ago).

I have no affiliation with the company nor do I own stock - but it just amazes me....
chechaco 12/5/2012 | 3:31:52 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz "... I don't understand why so many of the VPLS/MPLS players are now taking advantage of PBB to scale their network edge."
Please keep "apples" and "oranges" separate. PBB is clearly p2p solution and can be compared with PWE3. The VPLS/H-VPLS so far has no alternative even though it scales badly, has issues with redundancy and so on. PBB might be attractive alternative to PWE3 if and when you have Ethernet UNIs and no legacy circuits to support.
jepovic 12/5/2012 | 3:31:51 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz They should've sold the entire company while they could. What's the point of selling it piece by piece like this? Customers get scared and choose other suppliers, thus lowering the value even more. Is there anybody who believes the remains of Nortel will be able to succeed on its own? Essentially a North-American PBX business.

I would've done it the old-fashioned way: Talk to all the prospective buyers, lower the price until one of them accepts it. THEN I would announce the deal. It hurts, but it's better long-term.

Look at Lucent. Sure they are now dragging the once prosperous Alcatel into the mud, but from a ahreholder perspective it was a great idea to sell while it was possible.
mtb826 12/5/2012 | 3:31:50 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Abashford,
Get a clue, PBB is not PBB-TE and none of the key vendors in the ME space are supporting PBB-TE.

stephencooke 12/5/2012 | 3:31:50 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Hi,

My connections to Nortel include an interview for the CTO position a few years ago when Mike Z was first brought on board (he had already decided that he didn't want an x-Nortel person for the position) and about 10 years in the optical development and sales organizations. I have many friends who are still there (a lot fewer than years ago).

The way the accountants have destroyed this formerly prestigious company makes me sick. There is absolutely no medium-long term thinking there anymore. Suggestions of new ideas in this timeframe could make one a layoff candidate... quickly.

In a downward, competitive market you do NOT want an accountant running the company. This leads to short-term cost-cutting and layoffs that slowly kill the company. The innovation that NEEDS to occur for corporate health is simply stifled and/or punished.

GoodBye Nortel, it was fun while it lasted. I wish all the MEN employees well.

Steve.
GemfireCanada 12/5/2012 | 3:31:49 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz This would be a great buy for Huawei in my opinion and give them instant legitimacy in the NA market. Also given their buying power they could substantially reduce costs very quickly.
davallan 12/5/2012 | 3:31:49 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz mtb826.....

Would you care to elucidate the differences between PBB and PBB-TE? BTW This is not a trick question....

chechaco...

Why do you think PBB-TE is not suited to legacy and limited to p2p for Ethernet UNI only?, Once packetized, stuff does not tend to care about the wrapper....

I get the feeling you've read propaganda and not gone to primary sources....Facts please!

D
rjmcmahon 12/5/2012 | 3:31:47 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz re: "The regulations preventing competition have killed the teleco market."

With all due respect, when one turns towards blaming in order to cope with perceived failures it's time to look deeper and make sure our cognitions reflect reality.

In this case here are some other perceptions which I believe to be accurate.

o These networks are natural monopolies
o Natural monopolies are an economic condition, i.e. they are not created by government
o Best attempts at regulating into existence competition under these conditions, e.g. the 96 Telco Act and ILEC competition, have proven futile.
o Regulatory capture is par for the course in utilities
o Market failure combined with regulatory capture has occurred for US broadband networks
o Competition as a solution is based on belief rather than making observations of what has worked in the past under similar conditions.

So yes, the regulators have failed. But so has the misguided belief in markets and competition. The pot calling the kettle black and vice-versa isn't going to stimulate investment into natural monopolies. For that we'll need to resolve the false dualism.
rjs 12/5/2012 | 3:31:47 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz You NAILED it Materialgirl.

The regulations preventing competition have
killed the teleco market.

The Cable MSO and teleco 3 have consistently insisted on tying-in bit carriers with content and services. Commoditization of bit carriage (also called "dumb pipes") is what makes the network useful and that is what these oligopolies will fight with their last breath.

No hope for the NA teleco market. It is dead.
It reminds me of the Soviet Union.

-RJS
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