A year after taking reins, challenges trump accomplishments.
During his first year at the helm, Bill Owens has steered Nortel through perhaps the most challenging period in its 110-year history.
The company recently completed a series of financial restatements and now is emerging from a quagmire created by a massive accounting scandal that pre-dated Owens’ hiring as CEO (he had been on the board since 2002). Nortel is looking ahead with a renewed corporate network strategy that includes an aggressive campaign to attract federal government business and is underscored by the hiring of two former Cisco executives to top-level positions.
Based on its most recent financial results, Nortel clearly has lots of work to do. Its profits plummeted 75% in the fourth quarter, and the company experienced market share losses and declining sales in LAN switching, wireless and optical.
Nortel, which expects to release first-quarter results later this month, declined requests to interview Owens. But during a recent conference call with analysts to discuss fourth-quarter and full-year 2004 results, he acknowledged that last year was tough. Owens, who previously led now-defunct satellite communications provider Teledesic, said: “I’m not happy with the results for 2004 but the company is now stable.”
One thing Nortel has to build on is its solid customer base, Owens said.
“We’re emerging as a stronger company, building on integrity and ethics,” he added.
Among Owens’ accomplishments as head of Nortel are:
• Navigating the company through audits, investigations and restatements.
• Reorganizing the company into carrier and enterprise business units.
• Naming ex-Cisco executives and enterprise network industry veterans Gary Daichendt and Gary Kunis as president and COO, and CTO, respectively.
• Maintaining market leadership in carrier VoIP.
• Acquiring federal systems integrator PEC Solutions to better compete on U.S. government contracts.
• Appointing a chief compliance and ethics officer.
Nortel might be morally stronger, but the same cannot be said for its position in the market.
The company remains a distant No. 2 to Cisco in Ethernet LAN switching. It lost a full percentage point of share in 2004, to 4.7% of the $13.1 billion worldwide market for Layer 2, 3 and 4-7 switching, according to Dell’Oro Group. In Gigabit Ethernet switching, Nortel forfeited almost two percentage points, from 7.4% to 5.6% of the $6 billion worldwide market, according to Dell’Oro. Cisco commands 72% of the Layer 2, 3 and 4-7 Ethernet switch market, and 69% of the Gigabit Ethernet switch market.
Nortel’s enterprise revenue, which accounts for 24% of the company’s annual sales and amounts to its second-largest business, dropped 31% in the fourth quarter to $651 million, and 9% for all of 2004 to $2.4 billion.
Some analysts say the problem is that Nortel doesn’t have the enterprise “DNA,” a situation acknowledged by Owens last summer when he reorganized the company.
“I’d like to see them stop being quite so bashful, beat their chest a little bit more and really try to define themselves as a major enterprise vendor instead of being happy with being a distant No. 2,” says Zeus Kerravala, an analyst at The Yankee Group.
In wireless infrastructure, which is Nortel’s biggest business unit and accounts for virtually half of its $9.8 billion 2004 revenue, Nortel lost more than two percentage points in Code Division Multiple Access (CDMA ) – from 21.9% to 19.8% of the $8.8 billion worldwide market in 2004, according to Dell’Oro. Nortel also lost almost two percentage points in the $4.8 billion market for the newer Wide-band CDMA last year, from 4.5% to 2.8%.
“Management concedes that the company has lost market share and that customers have been concerned about the company’s financial difficulties,” stated UBS Warburg analyst Nikos Theodosopoulos in a bulletin on Nortel’s fourth quarter. “We note that while the overall wireless infrastructure market grew about 26% in 2004, Nortel’s wireless segment grew only 10% over the same time frame.”
Wireless revenue dropped 11% between Nortel’s third and fourth quarters. Sales of wireline equipment – which includes frame relay and ATM switches – declined 19% in the quarter and 14% for the year; and optical fell 28% in the quarter and 23% for the year.
“Because of all their difficulties they may be losing some ground,” says Dana Cooperson, an analyst with RHK. “Optical was always such a big area for them in the past and they’re having a little bit more trouble, facing a little bit more competition lately in that area.”
Alcatel and Fujitsu had the strongest revenue growth in optical transport in 2004, with 29% and 22%, respectively, according to Dell’Oro. Alcatel is the revenue share leader in this $6.9 billion worldwide market, followed by Nortel, Lucent and Fujitsu.
Nortel also has been late shipping some key products. For example, release of the company’s MPE 9000 multi-service edge router has been pushed out to mid-2005 from late 2004. Owens cited this delay as a factor in Nortel missing out on becoming one of BT’s eight strategic suppliers for its $19 billion 21st Century Network project.
Nonetheless, Owens has high hopes for 2005. Nortel expects to grow revenue in the first quarter and full year of 2005.
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