Ericsson posted strong fourth-quarter results as sales climbed 26% year-over-year and 16% quarter-over-quarter. The improved performance was led by good sales in Latin American, North America (Cingular) and Asia (non-China). Perhaps Ericsson’s healthier wireless results will bode well for Nortel’s fourth-quarter results, which should come out in the next week or so.
Archive for January, 2006
It’s been so quiet recently on the Nortel front that it’s newsworthy – albeit marginally – the company has won a $1.5-million contract to deploy a “very large” converged network at HOT Telecom’s new headquarters. HOT, one of Israel’s largest cablecos, will give its 1,400 employees the ability to access voice, e-mail and multi-media services using a variety of devices such as telephones, PCs and PDAs.
I’ve got an investment story in today’s National Post about how a growing number of analysts are jumping on the Nortel bandwagon. A big chunk of the enthusiasm has to do with the expectations newly-minted CEO Mike Zafirovski and his plan to revive the embattled company by giving it a sharper strategic vision – as opposed to its all-things-to-all-people approach that spread its focus (and R&D dollars) too thin. While Zafirovski is a breath of fresh air after John Roth, Frank Dunn and Bill Owens but investors should be cautious before they start to believe Nortel’s back on the right track. This is a company with a multitude of internal challenges that will time to fix, while it faces external issues such as rising competition from low-cost rivals such as Huawei and low margins in high-growth markets such as India and China. It would probably make sense to wait until Nortel issues its fourth-quarter results in a couple weeks before getting too excited about Nortel’s prospects, particularly given it should be the first time Mike Z. will talk publicly since he started the new gig in mid-November.
Nortel Networks could be making a comeback among investors if a BusinessWeek story is any indication. Entitled “Nortel’s New Lease on Life”, the article talks about how Nortel could do better than Lucent in sales growth and other financial metrics this year. Some of this optimism is focused on new Nortel CEO Mike Zafirovski, who has been hiding out from analysts and the media since he took the job in November. Anyone getting too excited about Nortel’s prospects should heed a comment from AIC analyst Peter Hofstra who warns the telecom market “is a tough business”.
Is it time for another Nortel love-fest? It certainly looks like the company is moving back into favour again given Scotia Capital analyst Gus Papageorgious and RBC Capital Markets analyst Mark Sue have both come out with enthusiastic research notes. The common theme is the expected impact of Nortel CEO Mike Zafirovski, who has been overhauling the company’s management team while maintaining an ultra-low profile since taking the helm in November. Zafirovski’s decision not to talk with analysts or the media is smart because it gives him time to get Nortel back on the right track from a strategic, management and operational perspective. When that exercise is completed or well on its way, he can move into the spotlight and offer some concrete views on Nortel’s direction. I think we’re going to discover Mike Z. is a different breed of cat from John Roth, Frank Dunn and Bill Owens.
Chahram Bolouri, who used to be Nortel’s president of global operations, has been hired as president and CEO with Air Canada Technical Services – the maintenance and repair division of Air Canada. Bolouri, who spent 23 years with Nortel, replaces Bill Zoeller, who is retiring after 31 years with Air Canada. Earlier this week, Frank Plastina – who used to run Nortel’s metro and enterprise divisions – was appointed Tekelec’s president and CEO.
If you’ve been holding your breath waiting for the date of Nortel’s 2006 AGM, you’ll be happy to know it will be May 2 in Toronto. This will be the second year in a row the meeting will be held in Toronto following stops in Calgary, Ottawa and Halifax. Here’s hoping this year’s AGM is shorter than last year’s, which lasted more than six hours as shareholders peppered questions at ex-CEO Bill Owens and chairman Red Wilson.
It hasn’t take long for ex-Nortel CEO Bill Owens to get back on the board bandwagon. Owens is one of five designees to Sprint’s board that will own its local communications business. You may remember Nortel rewarded Owens – as only Nortel can do – when he resigned many of his directorships to take the CEO position. Imagine that, you get your dream job in the private sector and you’re given $4.5-million to leave behind all those board jobs.
Frank Plastina, who was once considered a candidate to replace John Roth as Nortel’s CEO, has yet another new job – this time with Tekelec, which makes telecom equipment from fixed, mobile and packet networks. Plastina left Nortel in late-2002 where he was president of the company’s metro and enterprise networks business. Apparently, Plastina was disappointed after Frank Dunn succeeded Roth as CEO in late-2001. Who knows what would have happened if Plastina, who spent 15 years with Nortel, had been given the job. After Plastina left Nortel, he became president and CEO with Proxim Inc., which was a turnaround situation that proved to be a difficult challenge. Oppenheimer analyst Lawrence Harris described Plastina’s hiring by Tekelec as “positive, as Tekelec has gained an aggressive executive with significant contacts with carriers and substantial experience in switching and signaling”. Sounds like someone Nortel may have wanted to hire after Bill Owens retired.
According to India’s The Hindu, BSNL has lost a huge amount of revenue in the past two months due to the poor quality of its wireless network. According to the newspaper, Calcutta Telephones has told BSNL it will not make any payments until Ericsson and Nortel to fix the problems. The newspaper said Ericsson has supplied the intelligent network equipment while Nortel has deployed mobile switching centre and home location register gear. BSNL is preparing to solicit tenders for a $5-billion equipment contract but there is growing speculation Nortel will not bid aggressively or decline to bid at all given it will morethan $200-million on its current $500-million contract with BSNL. According to India’s Economic Times, Nortel has already turned down a $250-million order from BSNL. Morgan Stanely analyst Scott Coleman believes Alcatel and Ericsson are the leading candidates to win major pieces of BSNL’s new contract.
In less than a month, Nortel has $1.275-billion of debt coming due. The question being asked by analysts is how the company is going to deal with it. Nortel could issue equity but that would be extremely dilutive – 350 million shares – so that’s probably out. It could use some of its $3-billion of cash but you would think a telecom equipment maker would want to hold onto its cash given the industry’s volatility. Nortel could issue convertible bonds but that would involve equity as well at some point. So, that leaves new debt, which one analyst told Reuters would come with 9% rate over five years. Sanford Bernstein Paul Sagawa also believes Nortel will have to pay $1-billion to $2-billion to settle class-action lawsuits.
PEC Solutions, acquired by Nortel last year for $448-million, has a new name but does that change anything? In a recent research note, Morgan Stanley analyst Scott Coleman said he’s “skeptical PEC will provide Nortel with the pull-throgh it needs in the federal government space”. This isn’t a great assessment for a business that was hailed by ex-Nortel CEO Bill Owens as an important pillar of the company’s strategic focus on the government, services and security sectors. While Nortel is trying to spin PEC as an entity that will give it access to $10-billion of potential U.S. government business, the reality is it’s a mid-tier systems integrator battling it out for business in a competitive marketplace. Coleman said Nortel’s chance of getting a bigger piece of the action are bleak because Cisco and Foundry Networks are so well entrenched.
Come on down Dennis Carey, you’re the newest addition to Nortel’s executive ranks. Carey has been hired as executive vice-president, corporate operations, which makes him responsible for human resources, the business transformation office, ethics, information and services, and a mysterious area called “the company’s environment”. Not surprisingly, Carey’s resume includes stints at Motorola as well as 25 years with General Electric – two of Nortel CEO Mike Zafirovski’s former stomping grounds. Carey’s most recent job was executive VP, president and CEO of Motorola’s integrated electronic systems unit. Given Mike Z.’s severance agreement with Motorola includes a promise not to poach his former colleagues, I suspect Nortel must have cleared Carey’s hiring.
Morgan Stanley analyst Scott Coleman has downgraded Nortel to “equal-weight/in-line” from “overweight/in-line”, and reduced his revenue and EPS forecasts for 2006. In a research note, Coleman said the downgrade was prompted by a decision to reduce revenue estimates after a “deep dive” into the Indian wireless market – where Nortel has a money-losing contract with BSNL –
and checks on spending plans by carriers on optical networking equipment, and concern about Nortel’s prospects in the enterprise market. “We still expect cost structure improvement this year but have tempered our outlook, as we believe it will take time for the new supply chain management team to wring out operational inefficiencies.”
Given Juniper Networks‘s struggles and a management shakeup, does a merger between Nortel and Juniper makes sense? It might make some sense given Juniper’s strength in the router market and Nortel’s strength in the optical and wireless sectors – meaning there would be little overlap between the two companies. Of course, mega-mergers are often disasters because of culture differences but the telecom equipment market badly needs some consolidation so perhaps it could work, and maybe freshly-minted Nortel CEO Mike Zafirovski has the appetite and energy to do something really dramatic. A Juniper-Nortel deal would have to be a merger because Nortel can’t afford to pay $12-billion for Juniper, and Juniper can’t pay $13-billion for Nortel. TheStreet.com’s Scott Moritz has story today on Juniper’s issues and challenges.