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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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materialgirl 12/5/2012 | 3:31:46 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Make that RJM.
rjs 12/5/2012 | 3:31:46 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz RJM:

The two issues are independent. Separation of of Bit Carriers from service providers without tie-in is an end result. You are going into the detailed mechanics of how to.

What I am stressing is that once you separate the services and make the system open and transparent enough, you will have the market competition. It sure is a good place to start. Looking for an all or nothing solution is sure fire way of getting nothing done.

I am looking for the end result and I don't care how you skin the cat.


Finally, let me assure you that even with regulated utilities, barriers to market get erected very quickly. Case in point, the energy crisis in US. The power companies owning the power lines will fight tooth and nail with all their political power to prevent an open electricity market. No competition here, even if
the renewables could come in lower in price than coal.


You want competition, open the barrier to the market --- I don't care how, legislation, regulation or whatever.

Keep in mind that
corporations, unlike humans, DO NOT suffer from pangs of altruism.

-RJS
materialgirl 12/5/2012 | 3:31:46 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Dear JRM:

Everything you said is right, hence the problem. This administration has chosen to pretend the free markets, as defined by telco vs. cableco competition, will provide users what they want. The whole premise is hogwash.

We need to all hold hands, sing Koom By Ya, and admit to ourselves comms is fundamentally a monopoly, at least at the local level. It should be owned at the local level, with a financial incentive not to maximize profits for remote shareholders, but to provide local bandwidth at the lowest price. A co-op if you will. This is happening by accident in VT, where a smart couple is fibering the state.

This is not an easy nut to crack, which is why it is sad we spent the last 8 years not discussing how to do this.
rjmcmahon 12/5/2012 | 3:31:45 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz mg; I don't think a bunch of co-ops will get the job done in scale. I think what is needed are new monopolies. The first gals to build real broadband win exclusivity for 30 years. The only way she loses it is for non performance. Something like that might attract capital, capital that didn't flow towards these infrastructures despite two of the largest financial bubbles in recent history.
rjmcmahon 12/5/2012 | 3:31:44 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz re: "You want competition, open the barrier to the market --- I don't care how, legislation, regulation or whatever."

I don't really care much about competition though I do care about outcomes. The outcome needed here is investment and access to opportunities which support things like self expression. If that enables competition, so be it. But using competition as proxy to measure performance here is sorta a tautology which assumes incorrectly and measures the wrong thing.

Competition is a rivalry between individuals, groups, or nations for territory or resources. It arises whenever two or more parties strive for a goal that cannot be shared.

For the idealists amongst us, what we want to measure is access to opportunity and things like liberty.

Liberty, the freedom to act or believe without being stopped by unnecessary force. In modern time, is generally considered a concept of political philosophy and identifies the condition in which an individual has the ability to act according to his or her own will.

IMHO, those that focus on the latter will be doing more for society than those that idolize the former.
Fibre Bundle 12/5/2012 | 3:31:43 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz new Nortel webside! -).

materialgirl 12/5/2012 | 3:31:41 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz Dear RJM:

That is my point. We don't know what will work as much as what won't work. I fully agree that networks are natural monopolies, yet monopolies fail to address user needs with time. They also capture their regulators.

That just means we need to try new thinking, with trials of different strategies playing out over time to determine what unintended consequences raise their heads at scale. That in turn, takes time and money, which are the very things we are pissing away.

In eight years, while the ultimate goal has been clear to many, we have collectively:

1)Tried nothing new.
2)Invested existing cash in failed attempts to extend the status quo of service providers.
3)Squandered the rest of the capital of our system in unproductive real estate.

What fools.
rjmcmahon 12/5/2012 | 3:31:38 PM
re: Nortel to Sell Carrier Ethernet, Optical Biz mg; I sorta agree that new thinking is required. I'd probably word it differently though, calling it accurate thought (or its inverse, the removal of thought errors.)

History reveals that about every form of finance and ownership mechanisms used to motivate human behavior have been tried. From Samuel Insull to Skilling. From Wall Street printing equities to states printing bonds. All the ideas are out there and not much new thinking seems required here.

If the challenge we face isn't lack of ideas maybe it is a distortion in perceptions? Let me start with one possibility being the fear of monopoly. Our judgment says that monopoly is bad or evil as it can produce excessive profits for owners at expense of customers. The reality is that natural monopoly is can not be this when the capital has not been sunk. Sadly our society's approach to cope with this perceived "fear" of future monopolistic behavior is really ineffective. (Better may be to exploit the greed component which could motivate actual construction.)

So let's look at what broadband networks are (at least as of today._ While we agree that communications networks are natural monopolies, this is not a stagnant thing. On the front side it is much different than the back side. The difference between a build ahead of demand piece of infrastructure the enables a society vs. the exploitation of inheritance that the PSTN represents (and not only in trope.)

Broadband is not a pay as you go nor is it incremental. It doesn't work that way. It is and must be a step function. An improvement in and of magnitude.

To date no sweated labor has been done nor has capital been sunk, no regulators have been captured nor have profits been exploited. Why not?

Why hasn't a broadband monopoly been realized? For fear that monopolies are evil? That regulators will be captured? That profits will be exploited at the expense of customers? That the status quo will destroy those that strive for continuous human progress?

I think these are all cognitive distortions that are holding us back. Correcting these seem like the first order of business to me.
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