Nortel updates rebound progress

Nortel updates rebound progress

Nortel this week announced strategic initiative to focus on driving market share in metro Ethernet networks supporting high-bandwidth video applications.

The initiative was disclosed during two separate conference calls with media and analysts to update Nortel's progress during the first six months of President and CEO Mike Zafirovski's tenure with the company.

Nortel's Metro Ethernet Networks initiative will target development of products designed to deliver high reliability and security for service provider metro Ethernet wireline and wireless deployments, specifically for video applications. Philippe Morin, formerly general manager of Nortel's Optical division, will head the Metro Ethernet Networks effort.

Morin grew Nortel's optical business 24 percent last year, to US$1.2 billion, according to Zafirovski.

Metro Ethernet joins IPTV, IMS and WiMAX as a strategic focal point for Nortel's turnaround after restating years of financial results following an accounting scandal in 2004. Nortel is looking to gain at least 20 percent market share in product areas it deems "key," such as next generation mobility, enterprise infrastructure, and applications and services.

As part of that, Nortel is also decreasing its focus in other product areas, though Zafirovski declined to identify all of them during a conference call this week with the media. Nortel did exit or cancel activities in six product areas, which represented US$73 million in R&D in 2005.

"We will not go public with every single product decision," Zafirovski said. "This is a normal course of business. In my 31 years in business, we have never provided that level of granularity."

Nortel also reduced its activity in three product areas, reducing R&D from US$80 million in 2005 to US$39 million in 2006. Nortel also sold or has for sale two product operations that accounted for US$11 million in R&D in 2005, Zafirovski said. One of them was the company's blade server business.

The company is also increasing investment in three product areas -- IMS, IPTV and WiMAX -- by US$100 million over last year and US$67 million over 2006's budget; and has acquired a product line through its purchase of router maker Tasman Networks, where it will invest US$11 million this year.

Zafirovski said more product rationalization will be forthcoming.

"We will make sure that we align our investments and product offerings much tighter than ever before," he said.

Nortel also provided guidance for its first quarter, 2006, financial results. The company expects first quarter revenue to be flat to down slightly from a year ago, accompanied by a loss exceeding 2005's first quarter. The company reiterated that it expects to file its first quarter 2006 results no later than the week of June 5.

Nortel also said it expects strong revenue momentum for the rest of 2006, resulting in high single-digit growth for the full year 2006 compared to 2005. Analysts will believe it when they see it.

"They say by the end of the year it will show single digit growth," said telecom analyst Jeff Kagan. "However, based on history, we have to wait to see if this happens.

"Nortel has to transform the way it operates," Kagan says. "They have a plan, but they still have to make it work. They still have a very tough job ahead of them while the industry moves forward very quickly."

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