Nortel CEO Maps Out His Vision

Mike Zafirovski, now 100 days in the CEO chair at Nortel Networks Ltd. , has set his management a clear target for their business units: Attain a 20 percent market share, or "alternatives" will be considered. (See Nortel Names Zafirovski New CEO and Nortel, Moto Settle on Zafirovski .)

Addressing the RBC Capital Markets Communications, Media, and Technology conference Thursday, Zafirovski, who has had a major impact on the company since taking the helm, laid out his vision for Nortel's future and identified what needs to be addressed and fixed within the organization. (See Nortel Takes $2.5B Hit, Nortel & Huawei: Broadband Buddies, Nortel's New Faces Face Tough Task, and Nortel Takes Tasman for $100M.)

In his eyes, he's almost starting from scratch and building a new company: "We're at ground zero," he told his audience. "We're digging ourselves out of a hole."

So what's Zafirovski got to say, and what is he going to do? Here's a rundown of his thoughts on Nortel as a business, its technology and development, its customers, and its people.

Business and finance issues
Financial issues are a major concern for the CEO, who reckons Nortel's last good year was 1998. He's planning to address the company's cost structure, its procurement strategy, corporate governance and financial control, and, over the course of the next two to three years, put Nortel in a position where it can achieve double-digit operating margins.

He couldn't comment on whether Nortel managed to break the $10 billion revenues barrier in 2005, but noted that the company recorded revenue growth in the first nine months of last year for the first time in five years.

He also believes that within the company's DNA is an inherent knowledge about how to be a good partner. That's a view that some of its recent allies have disputed recently. (See Avici Downsizes to Survive and ECI: Nortel Didn't Deliver.)

Technology, R&D, market share
Zafirovski said Nortel has been "trying to be everything to everybody, spending enormous amounts on R&D" but without any real focus or direction. The company will outline next week how it intends to distribute its $1.9 billion R&D budget, with IMS (IP Multimedia Subsystem), IPTV, and WiMax to get bigger slices of the pie.

The CEO is also looking to attain a 20 percent market share in the sectors Nortel competes in. If that level can't be achieved, "then we'll look for some alternatives for those activities." He noted that of the 35 or 36 communications sectors identified by analysts at Lehman Brothers , Nortel participates in 22 but is the No. 1 player in just one market, and the No. 2 in another four.

"We have a lot of work to do in those other 17 markets to see if we can achieve the 20 percent share."

Steps are already being taken to shift focus and not waste resources. Zafirovski cited the "meaningful amounts of dollars" invested in the Neptune multiservice router, noting that "we thought we were too far behind with no reasonable chance of catching up." (See Neptune Changes Orbit.)

Another area where Nortel is aiming to make a greater impression is in services, which account for less than 20 percent of revenues at present. The CEO wants the dollar value of the services business to at least double. And to do that he needs someone to focus on that sector.

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chook0 12/5/2012 | 4:04:56 AM
re: Nortel CEO Maps Out His Vision >Ulimately, the CEO is responsible for all the >actions of his underlings. By doing nothing, >signalled that Roth was in full agreement with >Chandran's actions and decisions.

This is true. However, Roth had obviously been persuaded to stay on as figurehead CEO while Chandran ran the company. That he agreed was a huge lapse in judgement on his part, and he has paid dearly for that. But the arrangement was what the board of directors seemed to want.

> I disagree with this statement completely. What > Dunn did, was to put a once highly respected >company (that shared Cisco, Nokia & Motorola as >its peers) and permenantly pigeon-holed it with >the same corrupt group as Enron, Worldcom, >Imclone & Adeplhia. Nortel will forever be >remembered for this scandal, despite all the >great things it did before or after the scandal.

This is a silly statement. At least in the Enron and Worldcom cases, the senior management connived in large-scale fraud with the company balance sheet. The only wrongdoing found at Nortel was in the timing of the reversal of provisions, which is an accounting grey area and pre-Sarbanes-Oxley (when most of the things happened) it wouldn't have even been notable. Oh yes - in 1999/2000 there was revenue booked in the enterprise group that was never received because the customer went bankrupt.

You also have to remember that most of the accounting problems arose from a time during which the transaction load on the finance group was astronomical because of layoffs, sale of assets, cancelling of supplier orders, etc etc. But two out of three people in the finance group had been laid off.

I doubt if any of the respected companies that you mention would emerged unscathed from an examination by an army of hundreds of auditors, working without time pressure (excepting that the longer they take the more they get paid), looking at pre-Sarbanes-Oxley accounts with post-Sarbanes-Oxley eyes.

The whole thing for Dunn collapsed because of the return-to-profitability bonus. For some reason, NT returned to profitability one quarter earlier than expected. This was probably a management screw-up, and it probably resulted in some shenanigans with provisions in order to maintain profitability in the following quarters. You will make your own judgement about how much poor judgement and how much dishonesty was involved here. I will only note that amongst the troops in the trenches where morale was toxic, this sight of corner turning was a massive tonic and very good for the company. It is your privilege to place NT in the same bucket as Enron and Worldcom for this, but then would be my privilege to place you in the same basket as Dan Quayle and Joe McCarthy.

And the fact remains that at the beginnning of 2001, Nortel very nearly went bankrupt. Dunn averted that and brought the company back to profitability, and I doubt that many other people could have done it. As a shareholder I am very grateful for that because my shares that would otherwise have been worth nothing are worth $3 today.

I would also add that I was also pretty impressed by a guy who started out being drafted into the CEO position because nobody else of any ability would have the job turned himself from a geek accountant who could not face the camera without blinking into a reasonably credible CEO.

You will no doubt accuse me of unnecessary and unfashionable panegyrics. I would answer that I am pointing out that Dunn's legacy was not all bad.

^Eagle^ 12/5/2012 | 4:04:55 AM
re: Nortel CEO Maps Out His Vision Mr. Z states (I paraphrase) that if NT cannot have 20%+ of a given market, then NT should exit that market or make other radical changes (partnerships or re-strategize, etc.).

My observation is that while this metric works in consumer markets like cellular phones, and in the silicon chip markets where you divide the market based on applications, with very few exceptions this does not work in the telecom equipment space.

For instance: optical transport: does ANYONE have 20% of the market? The last numbers I read from RHK and Dell O'ro say that Alcatel at number 1 market share has about 16% or so. Hmm what else? What will it take to reach 20% of the cellular wireless infrastructure business? Especially competing against: Eriksson, Nokia, Lucent, Alcatel, Siemens, Huawei, ZTE, and Motorola. OK, I admit, there are a few exceptions: Cisco has way more than 20% of router space. But I would say that Ciscos sales are still enterprise centric sales (of course lots of $$ sales into RBOC and other carriers.. but again, even in sales to those carriers, largely the sales are for enterprise applications with the carriers acting as systems integrators. Did anyone know that the largest systems integrator in North America is SBC?... true fact. Very little of the router sales outside the core are for actual telecom applications). But I digress. What sectors are reasonable for NORTEL to acheive 20% share in?

Optical transport? Difficult. NO one has ever achieved this.
Optical switching.. a subset of transport
Video delivery?
Cellular Wireless either CDMA, GSM or other?
Enterprise Data?

OK... SS7.. Nortel probably has a third or more of the worldwide business in SS7 switching with the other two major players being Tekelec and Alcatel via its acquisition of DSC. SS7 is voice centric and even Tekelec (who derives a huge % of their revenue from this application) is trying to diversify their portfolio away from dependence on this app.

What else? Not trying to make a complete list, but rather trying to open a different line of thought and discussion on this board about the Nortel strategy. I am a LOT less interested in the personality and the resume of Mr. Z that others on this board.

I am VERY interested in what his "we need to achieve 20% share in order to stay in a given market / application" (again, I paraphrase his statement.. forgive the quotation marks).

What sectors will survive?

Machavelli 12/5/2012 | 4:04:55 AM
re: Nortel CEO Maps Out His Vision Chook,

You are rare bird indeed.
I have never met a Frank Dunn cheerleader before. I have met a few Paul Stern fans before, but never any fans of Frank Dunn. You are either Frank Dunn disguised as a Light Reading poster or a very naive person fooled by his BS.

And Frank Dunn as you pointed out comes from a finance / accounting background and should have known better about the legality of posting all the losses in one quarter and then all the gains in the next quarter to trigger return-to-proftability bonuses. This is beyond being in a grey region and is blantly against the law. That's why we have the Sarbanes Oxley act today, because all CEO must actually read before they sign off on all financial statements, so they can't use the "I didn't know" defense". If it was an honest mistake: Why were Frank Dunn and his croonies the chief benficiaries of the bonuses ?

I don't see why anybody would admire Frank Dunn.
He (and his friend Roth) helped bring down the stock from $120 to 80 cents. He implemented his "return-to-proftability" scam to make money off what was left of Nortel and brought the stock to $10 then to $2.00 (long enough to capture his bonus). It is only thanks to Owens that the stock has currently stabilized in the 3 to 4 dollar range. I can see your point that Frank Dunn added a lot of value at Nortel: For stock shorters and Put option holders that is.

If it is just a case of a minor accounting irregularity, why are they settling out-of-court ?

The answer: Mr. Z is smart enough to realize a good bargain when he sees it. It is cheaper to
pay 2.5 billion now (mostly in Nortel shares) and get the scandal as far behind you as
possible, than to fight it, rack up hundreds of millions in legal bills and wind up paying 5 or
7.5 billion in the end. There is no way in hell you could win a case of blantant fraud like
this. Three top finance guys plus Dunn were fired for cause, essentially an admission of guilt by the board of directors.
Stevery 12/5/2012 | 4:04:53 AM
re: Nortel CEO Maps Out His Vision So I don't know Z, nor have I encountered the guy. But this is what I liked:

For instance: optical transport: does ANYONE have 20% of the market? The last numbers I read from RHK and Dell O'ro say that Alcatel at number 1 market share has about 16% or so.
... Especially competing against: Eriksson, Nokia, Lucent, Alcatel, Siemens, Huawei, ZTE, and Motorola.

This is EXACTLY the point.

The lesson from GE is: you need to be #1 or 2 in a market. But GE is a highly diversified company with a large number of businesses competing for top management attention. So don't bother (and sell off) any business that's not top-rank, because we just don't have time for it.

Nortel is not GE: It is much less diversified, and is not top ranked. Since there are approximately 5 major players in any market segment, a sensible goal to set is: Own 1/5 of the market, or don't bother (sell off) and focus harder on things that will at least put NT on the major's list.
paolo.franzoi 12/5/2012 | 4:04:53 AM
re: Nortel CEO Maps Out His Vision
The 20% market share is a derivative of the GE "Be number 1 or number 2" strategy. There are plenty of markets that are industrial markets that GE has applied this to.

The markets as NT outlines them may not be as you outline them.

"What sectors are reasonable for NORTEL to acheive 20% share in?"

That is exactly the question that the strategy attempts to answer. To be the 5th player in most markets means that one is investing as much as the number one or number two player but receiving none of the benefits (like significant revenue).

Let's take Optical Transport. At one time, there were few companies in this business (go back 20 years) and Lucent had a 20% market share. Now, with all the changes in the market the gross margins have declined into the 20% range at best. Now, why would you want to invest a penny in a market that you will have very uncertain revenues and no profit?

fiberous 12/5/2012 | 4:04:52 AM
re: Nortel CEO Maps Out His Vision Ed Zander!!

He was a miserable fit and a failure at Sun.
He used to work as a sales guy at Data General.

Really, these are quality CEOs?

^Eagle^ 12/5/2012 | 4:04:49 AM
re: Nortel CEO Maps Out His Vision seven,

I completely agree with your post. It makes my point precisely.

chook0 12/5/2012 | 4:04:49 AM
re: Nortel CEO Maps Out His Vision Sorry. Machiavelli. I am not Frank Dunn posting incognito.

And if you read my post you would have seen that I did not defend the return to profitability bonus for the senior management. I said you could make your own judgement as to whether it was stupid or dishonest (personally I think both were a factor but I have no strong evidence either way). If you think that is praise, then you led a deprived childhood. :-)

If the placement of provisions was "blatantly against the law", then I would expect there to have been criminal prosecutions in the matter. There weren't. In fact, Nortel has not even been successful in reclaiming the bonuses from the people who didn't voluntarily return them.

BTW: Nortel shares went from $120 to 0.43. They hit $0.43 because most people thought the company could not survive the drunken excesses of 2000. By Q1 2004, people were actually saying very good things about the job Dunn had done in getting the company back on the tracks. The story is told in the accounts and if anything the restatements since mid-2004 show that the company was actually healthier at that time than originally thought. (which is in fact what all the fuss has been about, after all.)

I'm not being a cheerleader here, but I do believe in credit where credit is due.

There are many examples from the time of companies that took all their hits in one quarter and dribbled them back into the system over time. Think back to the first week of May, 2001 when a certain respected company wrote off $2.25B of inventory, over $700M of which was added back into the numbers over the next 5 quarters.

Completely agree with you about Mr. Z. being smart to settle the shareholder suit though. The sorry business needs to be got into the past. For information, NT actually terminated for cause the CEO, CFO, Chief controller and *7* top finance guys.

Metropolitian 12/5/2012 | 4:04:48 AM
re: Nortel CEO Maps Out His Vision I agree, there is some notable differences between GE and Nortel.

GE owns many businesses (Jet engines, NBC, medical equipment, light bulbs, etc.) that have no possible synergies nor cross-selling opportunities amongst themselves so the 20% or better rule of market share makes sense.

Within Nortel, many potential synergy and cross-selling opportunities exist between the many divisions (wireless, entrperise, optical, etc). So I do not agree with using the 20% rule in isolation. The rule might make sense in regards to market share within a country, but not per product lines.
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