Can the staid Canadian network equipment provider checkmate faster, flashier enterprise players?
Eighteen months into his tenure as CEO, former U.S. Navy Admiral Bill Owens has earned high marks from users and analysts for righting the ship at Nortel in the wake of a major accounting scandal.
Who is Bill Owens?
Nortel user group execs speak out
Nortel timeline of trouble
Now he faces an even more daunting task: leading Nortel to sustained revenue growth and profitability armed with a product line that’s showing some rust, with marketing that’s known for being less than stellar, and without two of his hand-picked lieutenants, who jumped ship in June.
In March, Owens hired two ex-Cisco hot shots to drive Nortel’s push into the enterprise. Three months later, President and COO Gary Daichendt and CTO Gary Kunis were on a plane back to Silicon Valley. Although no one was commenting publicly, the scuttlebutt was that the Garys wanted to rock the boat, while Owens and the board favored a more measured course.
But a steady hand might be exactly what many U.S. customers want after the turbulence of the past five years that saw Nortel battered by the telecom market crash, then hit with an embarrassing accounting scandal.
Greg Britz, telecom manager at Burlington Northern Santa Fe Railway Co. in Fort Worth, Texas, concedes that Nortel has lagged behind competitors in delivering the latest technology. An example he cites is routers with built-in security.
But Britz says he can always count on Nortel for quality engineering and reliable technical support. “With Nortel, there are always questions about when they’ll deliver product. It’s not whether they’re behind the competition, it’s whether they’re one or two years behind. But when they finally deliver, they’re always standards-compliant, and we’ll wait for that in the transportation industry.”
He also expresses confidence in Owens. “I have to give Owens credit for keeping stability in place during all the turmoil. We don’t see any changes in the company from an operation standpoint.”
To long-time Nortel customers, Owens, former CEO at Teledesic, brings the veteran leadership they’re looking for, and the comings and goings of Daichendt and Kunis are viewed as minor blips that barely registered on the radar screen.
“Owens had two distinct objectives when he came on board: to straighten out the company’s finances and to take the company forward from there, and he’s done both of those things very well,” says Victor Boehnert, executive director of the Nortel user group INNUA .
Michael Hazdra, telecom manager at Benedictine University in Lisle, Ill., adds that Owens “is doing what he has to do to keep the company alive, especially in light of the competition, which is moving toward convergence.”
Hazdra praised Nortel for cutting prices on software upgrades, which will make it more likely that he trades his Nortel Meridian PBX for a Nortel Succession converged data system. As for the departure of Daichendt and Kunis, Hazdra says, “Any personnel decisions haven’t affected the way we view the company. We don’t have plans to leave Nortel.”
Steve Levy, an analyst at Lehman Brothers in New York, adds, “As long as there’s no liquidity crisis, and Nortel continues to deliver technology and product, they’ll be fine. I hear and see no change in customer relationships with Nortel.”
First things first
Owens, who had been a member of the Nortel board, stepped into the breach when former CEO Frank Dunn was fired in early 2004 in the wake of the accounting scandal. Owens’ top priority was to get the company’s finances back in order after Nortel publicly admitted that it had made serious accounting errors.
Owens described his first year at the helm as a “transition year” in which Nortel spent $200 million, and expended “a lot of management attention” on getting the company’s books ship shape again, and putting new accounting processes in place that would ease the concerns of investors, regulators and customers.
He conceded, in a recent Network World interview, that the time and effort spent on the company’s financial woes were “a distraction.” According to Dell ‘Oro Group , Nortel’s market share has slipped in several key areas, including switched Ethernet gear and PBXs.
Nortel had to restate earnings back to 2001 and was late filing its 2004 annual report, but the company has finally caught up in terms of filing earnings reports on time.
The latest financials have been somewhat of a pleasant surprise. For the second quarter of 2005, Nortel reported profits of $45 million on revenue of $2.86 billion, up 10% from a year ago. But that still leaves Nortel with $4 million in losses for the first half of 2005.
The good news for Nortel is that enterprise network revenue jumped 26% in the second quarter compared with a year ago to $730 million, making it the fastest growing of Nortel’s four roughly equal-sized segments.
Carrier packet networks increased 3% to $743 million, wireless GSM and Universal Mobile Telecommunications System networks increased only 1% to $719 million, and Code Division Multiple Access wireless networks increased 17% to $662 million.
But the financial scandal still casts a shadow. According to Paul Sagawa, an analyst at Sanford C. Bernstein & Co., in New York, Nortel faces two ongoing shareholder lawsuits, which will likely be settled out of court, not to mention probable fines levied by the U.S. Securities and Exchange Commission and Canada’s Ontario Securities Commission.
“The evidence points toward settlements that could total $2 billion or more,” Sagawa says. “And since the company has admitted to wrongdoing, there will also be government fines. I’m convinced all this is going to weigh heavily on the company’s stock price.”
Nortel’s stock has been drifting downward throughout Owens’ tenure. It was $8.50 in the first quarter of 2004 but has slipped to the $3 range.
Nortel does have $3 billion in the bank, but settlements from the financial scandal could eat up a chunk of that. And Nortel recently shelled out $450 million to buy PEC Solutions, a company that provides IT professional services to federal, state and local governments.
To Owens, the move represents a bold bid to enter a new market. But Sagawa questions whether Nortel should be drawing down its cash reserves. And he says Nortel has been losing market share in most of its product categories, in part becauseof the distraction of the financial scandal, and suggests that Nortel should focus on fixing its existing business segments before taking on new ones.
The plan of attack
Owens’ plan hinges on cutting costs, keeping a sizable cash reserve and growing revenue, particularly in the enterprise, where Nortel is focusing on VoIP, security and wireless gear .
On the cost-cutting side, he announced layoffs of more than 3,000 workers and says Nortel will cut some R&D when it comes to legacy products. “We can’t afford to upgrade everything,” he says.
Last year, Owens reorganized the company into carrier and enterprise divisions, and launched a renewed push into corporate accounts. “From my early days I was saying that we needed to bulk up enterprise,” Owens said in a recent Network World interview. “We are distant from Cisco, but we have the ability to grow that business substantially.”
But Forrester Research analyst Ellen Daley says Nortel faces an uphill battle when it comes to competing in the U.S. against Cisco. “Cisco is a hard nut to crack with their channel structure. There’s a lot going on right now in the enterprise area – wireless, networking, VoIP, upgrades to voice – and Cisco is dominant in all of those.”
But Owens says Nortel has been able to compete head to head against Cisco and win contracts based on quality and cost. “Cisco is vulnerable in that they don’t have any strong competitors,” he adds.
Alex Pierson, general manager of Nortel’s enterprise business, concedes that Nortel isn’t about to challenge Cisco on its home turf. “We’re not going to battle it out over products like routers,” Pierson says.
But Pierson says Nortel is prepared to make a stand when it comes to VoIP. “Where voice and data come together in converged networks, our goal is to be the choice for existing and new customers doing network upgrades. Today, in the data convergence area, real-time communication is what that’s all about, and what we want to be known for.”
Mobilizing the base
The key for Nortel will be taking advantage of its enterprise user base and continuing to come out with new products.
“The name of the game is to leverage their installed base. Our IP PBX market research suggests that Nortel is one of the top three, along with Cisco and Avaya. Both Avaya and Nortel have large bases of products in North America, and that’s a huge advantage for them,” says IDC analyst Tom Valovic.
Nortel’s Succession line of IP PBX products, VoIP handsets and unified messaging products, along with its application switches based on its 2003 acquisition of Alteon, combine to give the company a solid foundation, adds Rob Whiteley, an analyst at Forrester Research.
“Nortel started out as a voice-oriented company, but they can attack the enterprise in VoIP by IP-enabling their PBXs, and saying, ‘We’ll sell switches along the way,'” Whiteley says. “But it’s not clear that they have the portfolio, just pockets of success, like they had with Alteon, but even that didn’t keep pace with the start-ups, or even with Cisco. They’re innovative, but they didn’t put as much R&D into these projects. In the Contivity line, for example, they were slower to adopt endpoint security.”
According to Pierson, Nortel is taking a two-pronged approach to product development, building its own and partnering. For example, Nortel is teaming with Research in Motion to provide Session Initiation Protocol-enabled communication over wireless LANs , with Symantec to add security into telephony products, and with Trapeze on wireless LAN gear.
Owens suggested in a recent Network World interview that the company would probably look to a partner to help fill out its router product line.
But Nortel also is developing its own contact center and interactive voice response (IVR) systems, as well as converged multimedia products based on IP multimedia subsystem technology.
In addition, Nortel is building momentum on the wireless side of the business, winning new contracts for 3G mobile voice and data networks with companies such as Orange France and Telefonica Moviles Espana. Nortel recently won a major SSL VPN deployment with Sabre Holdings, and is working with carriers in China, Japan, Israel and elsewhere on advanced broadband networks.
And the PEC Solutions acquisition puts Nortel in the government contract business, as well.
Customers remain loyal
“Where we use [Nortel’s] products, we plan to stay with them,” says Jim Trautwein, CEO at BankAtlantic in Fort Lauderdale, Fla.
Several years ago, BankAtlantic installed a Nortel converged voice and data management system to handle telephony needs in 40% of its 75 branches. Early this year, with the construction of a new headquarters and operations center, the bank had the opportunity to select a new vendor. In the end, it invested “several million dollars” in Nortel’s Succession IP telephony system, Trautwein says.
Trautwein adds that the bank’s decision to stick with Nortel was primarily based on reliability and ease of maintenance. The 24-hour call center gets about 750,000 calls per month. A legacy IVR system integrated with Nortel’s Succession platform handles many of the calls, but human customer service agents still participate in about 150,000 calls per month. All 75 branches of the bank now have Nortel Business Communication Manager systems in place, Trautwein says.
Nortel continues to get high grades when it comes to service and support. “At one point we got donated a Cisco AVVID VoIP system,” says Steve Noyes, director of information and communications technology at Mount Sinai Hospital in Toronto.
He was having trouble integrating the Cisco system with his existing Nortel VoIP gear. “But Nortel’s engineers came on site and almost disregarded that the other system was Cisco’s. Their ability to come in and have a support engineer on site was huge.”
Marketing muscle
Observers have been saying for years that for Nortel to succeed against marketing powerhouses such as Cisco, the company should be more aggressive about promoting its strengths.
Instead, the company has taken a low-key approach, Noyes says. “Nortel is a typical Canadian company, quietly going about their business, while companies like Cisco make all the noise. It’s sort of an American vs. Canadian way of doing things.”
Pierson says Nortel has gotten the message. “We’re going to get more aggressive about pushing our image. We’re also being a little more bold in driving the fact that we can provide a complete, turnkey solution for enterprise networking.”
Webster is a freelance writer living in Providence. He can be reached at john.s.webster@verizon.net.
