Sprint snub and analyst evaluations encourage abandonment
ORLANDO — Nortel remains steadfast in its plan to become a leader in WiMAX despite losing out on the Sprint Nextel contract and suggestions from two investment firms that it re-evaluate its presence in the market.
Read a story on Sprint’s decision to select WiMAX as its fourth generation (4G) wireless technology.
Nortel is determined not to repeat the unfortunate situation in Universal Mobile Telecommunications System access, where it had capable assets but could not build market share. Nortel recently sold those assets to Alcatel-Lucent for $320 million even though revenues from the business were $750 million in 2006.
“No one should question our resolve,” Richard Lowe, president of Nortel’s Mobility and Converged Core Networks (MCCN) business, said at this week’s CTIA Wireless 2007 conference here. “Our team is very focused on WiMAX. We want a Tier 1 win.”
After a period of management overhaul, operational restructuring and product rationalization, Nortel identified WiMAX as one of three key areas the company will focus on for future growth. The other two are IP Multimedia Subystem and IPTV. Nortel this week announced a couple of WiMAX achievements – with Mobile Satellite Ventures and Wind Telecom – as well as a trial with TVA in Brazil earlier this month, but a showcase win with a major carrier eludes it.
Also earlier this month, investment firm CIBC World Markets issued a research report suggesting Nortel acquire its way aggressively into the WiMAX market or exit it and the Long Term Evolution (LTE) market altogether. Like WiMAX, LTE is a fourth generation (4G) wireless technology based on Orthogonal Frequency Division Multiplexing (OFDM).
CIBC’s reasoning was that the return on Nortel’s WiMAX investment would not be as healthy as other product areas and would strain profits.
“Nortel needs to still focus its strategy and narrow its business activities to a smaller number of opportunities which should be pursued more aggressively,” states CIBC analyst Ittai Kidron in the report.
“We see two options: 1. Exit WiMAX and use savings to boost earnings per share or redeploy in other areas where better return on investment could be achieved,” Kidron states. The other option, according to Kidron’s report, is for Nortel to cut internal R&D and accelerate penetration into the WiMAX market through an acquisition.
“In LTE,” Kidron states, “we don’t see how Nortel can compete successfully and see an exit as best outcome.”
In January, UBS Warburg issued an investor bulletin that suggested Nortel re-evaluate its entire wireless strategy in light of it not getting any piece of the Sprint Nextel WiMAX contract even though Nortel is an incumbent CDMA vendor to Sprint. Sprint Nextel is investing $3 billion in a WiMAX network to turn up service in 2008 and has selected Nokia, Motorola, and Samsung as its strategic suppliers.
“No doubt, we are disappointed about their decision,” Lowe said of Sprint’s vendor selection. “It was driven by an early adopter’s need for an ecosystem,” or group of partner vendors.
Lowe added, however, “The minute any one of [the vendors] stumbles, we will be right there.”
Lowe acknowledged that Nortel considered a WiMAX acquisition but “we’re not convinced it’s necessary. We need to tighten our partnerships on the device side.”
“We’re pretty comfortable in the direction we’re taking,” he said. “We can be competitive in access and core.”
Lowe added that Nortel is looking at 4G in total, not WiMAX in isolation. In addition to WiMAX and LTE, Nortel is investing in Ultra Mobile Broadband, the 4G OFDM technology endorsed by the 3rd Generation Partnership Project 2 industry group.
Nortel plans to assess which direction the wireless industry takes in 4G before streamlining its investments and developments.
“We’ll watch very closely to see how the market pans out,” Lowe said. Nortel has upped its expectations for the global WiMAX market to $9 billion in revenue by 2009 from $7 billion.
Investors may not be as patient. CIBC’s Kidron says that his firm’s analysis suggests MCCN’s operating margin could improve by 2.4% to 3.8% through 2010 if WiMAX/LTE is abandoned.
“Further, we believe Nortel’s earnings per share is diluted by as much as $0.24 to $0.37 annually, as long as WiMAX and LTE are pursued,” Kidron’s report states.
“We also show that even if Nortel’s internal targets are achieved, they don’t represent a compelling long-term investment case,” the report states. “We see better options to realize value and would prefer Nortel abandon its WiMAX and LTE initiatives.”
