CEO Dunn's done, but what of Nortel?

* Nortel after CEO Frank Dunn

Nortel customers should stay put until the dust settles after last week's ouster of CEO Frank Dunn, users and analysts say.

Nortel as a company is not going away, observers say. The company is merely cleaning up its management ranks while it and the Securities and Exchange Commission continue investigating accounting practices that are forcing Nortel to restate financial results going back to 2000.

"The accounting woes do not threaten the viability of the company," analyst Paul Sagawa of Sanford C. Bernstein wrote in the investment research firm's bulletin about the Nortel housecleaning. "Even with [a] lower gross margin level, Nortel should remain profitable in 2004 and positioned to benefit from the ongoing - and in our view sustainable - improvement in the overall infrastructure spending environment."

Bruce Meyer, director of network services at Nortel switch customer ProMedica Healthcare in Toledo, Ohio, isn't panicking.

"How Nortel reports its profits isn't as import to me as what they spend on R&D," Meyer says. "As long as their technical commitment is there, which I think it is, I'll be comfortable."

He says he might have a different opinion if his situation was different.

"If I were starting out from scratch and I saw the CEO of Nortel was just fired, I might be more inclined to go with Cisco," Meyers says.

Nortel has been involved in an ongoing independent review of the circumstances leading to the reissuing of its financial statements for 2000, 2001 and 2002 and for the first and second quarters of 2003. As a result of those investigations, Dunn was "terminated for cause," Nortel said last week.

Former CFO Douglas Beatty and former controller Michael Gollogly - both of whom were suspended by the company in March - also were terminated for cause. Nortel also delayed the release of its financial results for the first quarter of the year.

"Everybody wants to see what the dirty laundry is before they do anything," says Frank Dzubeck, president of consultancy Communications Network Architects. "I don't see any concerns about bankruptcy or change of direction. Nortel's working on new routers and stuff like that."

Concentrate on enterprise networks

Industry watchers say they would like to see Nortel's new CEO direct the company to pay more attention to the enterprise network market.

Dunn lacked the "John Chambers-like" vision for enterprise networks, says Zeus Kerravala, an analyst at The Yankee Group, referring to Cisco's CEO.

"Nortel itself lacks brand-name recognition in the enterprise," he says. "Their products - Contivity, Alteon, Meridian, Norstar - have gotten better name recognition than Nortel itself."

Nortel's enterprise business accounted for 22% of the company's $2.83 billion revenue in the fourth quarter of 2003,

William Owens, a Nortel director, has replaced Dunn. Interim CFO William Kerr and controller MaryAnne Pahapill have replaced Beatty and Gollogly, respectively, on a permanent basis.

As part of its restated results, Nortel said it expects a 50% reduction in 2003 net earnings, though losses in previous years won't be as bad as reported.

IDG News Service contributed to this story.

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