Baird & Co. analyst Kenneth Muth has downgraded Nortel to a “neutral” from “
under-outperform” due to concerns about spending trends by wireless and wireline carriers during the second quarter. Muth said he doesn’t expect Nortel to execute a turnaround as quickly as it anticipates despite efforts by CEO Mike Zafirovski to restore the company’s financial credibility and grow profit margins. “All of Nortel’s traditional and next-generation product initiatives face some key competitive threats,” he said in a research report. “If the company is unable to win major contracts with global incumbent carriers, its financials could be impacted negatively.” Muth, who doesn’t think Nortel can achieve its $1.5 billion in operating profit goal wouldn’t happen until 2009, also reduced his stock price target to $2 from $3.
Archive for July, 2006
Baird & Co. analyst Kenneth Muth has downgraded Nortel to a “neutral” from “
The Wall St. Journal has a story in today’s paper (registration required) looking at whether Nortel will get to keep $3.9-billion of deferred tax credits on its balance sheet. The WSJ cites an analyst – Glass Lewis’ Jason Williams – who believes Nortel may have to write down the value of the credits, which could be used in the future to offset tax liabilities on profits. (assuming CEO Mike Zafirovski’s strategic makeover is successful and Nortel becomes profitable again) Nortel argues it has yet to write down the value of the tax credits because they don’t expire for a few more years, and that it’s following U.S. generally accepted accounting principles. In securities filings, however, Nortel notes that it decided not to take write-downs on the tax credits because of its forecasts of future profits and because most of the credits won’t expire for several years or more.
Nortel is expected to post its second-quarter results next week (perhaps Wednesday). It will be interesting to see how much of an impact CEO Mike Zafirovski’s cost-cutting program will have on the bottle line. Any sign that profits are on the rise could easily give Nortel watchers another excuse to jump on the bandwagon and proclaim Mike Z.’s efforts a rousing success.
According to Infonetics, capital expenditures by telecom service providers climbed to $202-billion last year, and it is expected to hit $236-billion by 2009. In total, this will mean capex of $1.1-trillion over the next four years. "Collectively spending over a trillion dollars in five years sounds like a lot of money, but it’s actually significantly less than it would be if there weren’t so much consolidation going on," said Stéphane Téral, principal analyst with Infonetics Research. "The number of providers is decreasing due to mergers, which is increasing the economies of scale for the combined entities, resulting in considerable capex savings. This is why overall capex growth is slow now." Infonetics expects service provider revenue to grow 4% annually over the next five years: from $1.2 trillion to $1.4 trillion between 2005 and 2009.
According to Red Herring, Verizon Wireless’ aggressive plans to provide multi-media services such as voice, video and data over an IP-based network will involve five of its largest equipment suppliers – Nortel, Cisco, Lucent, Motorola and Qualcomm. The project involves an industry standard called IP Multimedia Subsystem (IM).
Nortel could be edging closer to selling or spinning off its UMTS access business in light of some recent organizational changes. In a mini-report, UBS Securities said the company’s GSM and UMTS access businesses have been separated. As well, the vice-president and general managers for Nortel’s WiMax and converged core networks units have “moved on” (fired, reassigned?). UBS expects Nortel’s sales this year to rise 7.9% vs. guidance of high single-digit growth. However, the investment firm said the business landscape is “challenging and there is downside risk to our estimates”. Network World’s Jim Duffy offers his take here.
According to Forbes.com, RBC Capital Markets analyst Mark Sue has dropped his 12-month stock price target on Nortel to $3 from $3.50 due to concerns the growth of the company’s CDMA business, which accounts for 50% of its wireless sales, has already peaked. Among Sue’s concerns is the migration from CDMA to GSM by carriers such as Brazil’s Vivo – a trend spurred on by suppliers such as Ericsson and Huawei. Sue said a financial and strategic challenge facing Nortel is CDMA still generates significant amounts of revenue and cash flow from customers such as Verizon and Sprint Nextel. Speaking of GSM, Rogers Wireless is celebrating its fifth anniversary with the technology.
There’s always a new drama at Nortel. Amnesty International launched a global campaign yesterday against Internet repression, which it claims involves companies that aid in censorship and repression of freedom of speech. Amnesty’s hit list also includes Sun, Cisco, Yahoo! and Google. “From Iran to the Maldives and Cuba to Vietnam, governments are both cracking down on those who use the Internet to communicate their ways and denying citizens access to its wealth of information,” Amnesty said. “Web users are locked up, Internet cafes are shut down, chat rooms are policed and blogs deleted. Websites are blocked, foreign news banned, and search engines filter out sensitive results.” Nortel has also been cited by human rights activists for a contract it has with the Chinese Ministry of Railways to build a wireless network into Tibet.
Local Techwire has a round up on the reaction to Nortel’s four-year deal with Microsoft involving unified communications. Among the most critical people is tech curmudgeon John Dvorak, who goes after Nortel CEO Mike Zafirovski’s strategy to focus on software and services. “I knew there was a serious problem with marijuana in Canada,” Dvorak wrote. “I just knew it.” Other industry watchers such as Forbes.com like the deal. Only will tell if this strategic relationship actually leads to significant business or whether it’s just one of those partnership announcements that never go anywhere.
Verizon Wireless has selected Nortel Networks to help meet its goal of launching CDMA 1X EVDO Rev-A service, which offers speeds up to 3.1Mbps, by the end of next year. Terms of the deal were not announced. Verizon already uses Lucent to provide it with Rev-A gear.
Robert W Baird has maintained its “outperform” rating on Nortel Networks with a $3 target price. The investment firm said Nortel’s four-year strategic alliance with Microsoft should improve its position in voice-based hardware products.
In a press release yesterday to announce a strategic partnership between Microsoft and Nortel involving unified communications, Nortel CEO Mike Zafirovski said the four-year deal could generate more than $1-billion in sales. The question that was not answered properly or articulated well enough is how and when these sales will happen. How much, for example, will be from hardware, software and services – a key consideration given each business has different profit margins. This led some analysts to suggest the $1-billion will happen by 2009, while others suggested it could happen over the four-year deal. A key issue is when the contract will start to generate revenue. Microsoft has been talking about how its unified communications portfolio will be rolled out this year but product delays have become a familiar tune in Redmond recently. Another question that needs to be explored is whether the unified communications market is ready to see strong growth. The idea of seamlessly blending together e-mail, voice, video and data is not a new concept but one that has been modestly embraced by corporate customers. Maybe it’s just a matter of time as IP networks become more ubiquitous, and companies start to leverage them to launch different applications. But as it stands, there’s a lot of excitement (particularly coming from Microsoft and Nortel) these days but not a lot of “meat”. By the way, another interesting angle to the Microsoft-Nortel alliance is why Microsoft, which is intent on becoming a big player in the business communications market, didn’t use some of its $35-billion of cash to buy Nortel. Microsoft CEO Steve Ballmer talked about how each company had its core competencies and they will form a strong partnership – but it’s an intriguing possibility.
Not that it really matters (but, of course, it does!), I’m puzzled why I can’t get any love from TechMeme today about the Microsoft-Nortel deal. It’s not there are that many blogs focused on Nortel (well, one to be exact) so All Nortel, All the Time’s absense is a mystery. Update: Who says a little complaining doesn’t work? I got a tiny bit of TechMeme love yesterday. Maybe All Nortel, All the Time has made the approved list…:)
Nortel has signed a four-year deal with Microsoft. Nortel CEO Mike Zafirovski says it could generate more than $1-billion of revenue. The deal, which includes a lot of optimism and a lot of unknowns given the unified messaging market has yet to really see robust growth, could be a win-win for both companies. It could give Nortel some more exposure in the enterprise market, while boosting Microsoft’s efforts to become a bigger player in the business communications arena. For Nortel, this is really a deal it had to do given the PBX market has quickly evolved from hardware with some software to software with some hardware. Sooner or later, the PBX business and the business communications software business were going to collide. By striking a deal now with Microsoft, Nortel avoids the inevitable and positions itself for a potentially brighter future – or at least one that won’t be as bleak. For more, check out Microsoft’s PressPass, VoIP and Gadgets Blog and GigaOm.