A look at overseas vendors

International vendors endured a rough year, but seem to have weathered the worst.

Several European and Asian vendors have built significant U.S. presences and want even more of your business. But as these vendors pitch their wares, how can you determine their financial viability? Because they’re not based in the U.S., we don’t include them in the Network World 200, our annual report card on the 200 biggest domestic network companies.

Here we do the due diligence for you on six of the biggest internationally based network gear vendors. For the public companies, we began by culling quarterly and annual reports filed to the U.S. Securities and Exchange Commission. (If a company sells stock in the U.S. as a foreign issuer, it must file financial data with the SEC. But the reporting differs from what is required of domestic companies.) We then sifted through other documents – press statements, for example, in which a company, public or private, might discuss finances. Wherever possible, we attempted to obtain U.S.-specific information, yet this data is entirely dependent on a vendor’s willingness to provide it. Some have sporadically reported U.S. figures, others reveal North American data or combine the entire Western Hemisphere into a region called “the Americas.” Still others offer no regional data.

The figures presented here are intended to help you gauge a company’s financial health, compared with itself a year ago. Conversions to U.S. dollars are estimated, where necessary, for your convenience.

Like nearly all network vendors that earn significant portions of their income from the service provider sector, Alcatel is in the final stages of a multi-year restructuring it hopes will boost its hurting bottom line. Driving this makeover was Alcatel’s decision to concentrate more fully on its network business by shedding unrelated units. It has made significant progress, selling off defense electronics, nuclear power and optical component lines, for instance.

The result has been layoffs that reduced U.S. forces by about one-third. Alcatel entered 2003 with about 13,000 U.S. employees out of 76,000 worldwide. Globally, it finished 2003 with 60,000 employees – its announced ultimate head-count goal. The constant restructuring has taken a toll on the company’s profits, though. It posted a loss of $2.4 billion (1.9 billion euros) for 2003, according to its SEC 6K filing. This is an improvement over its posted loss of $6 billion (4.8 billion euros) for 2002.

Alcatel’s sales for 2003 fell in all areas and all geographic markets. The bright spot was an uptick in fourth-quarter sales over third-quarter sales. Although this improved figure still fell far short of Alcatel’s 2002 fourth-quarter sales, it indicates that the telecom industry is beginning to spend. Much of Alcatel’s thrust continues to be focused on service providers with wireless, VoIP, IP router and DSL equipment. But its major momentum in the U.S. lately surrounds call-center gear sold by subsidiary Genesys Telecommunications Laboratories (acquired in 2000). It also made waves earlier this year by introducing a Web-services-based, Bluetooth-ready softphone for enterprise VoIP customers.

Ericsson had a tough 2003, but a better-than-expected fourth quarter has management proclaiming that the worst might be over for the wireless infrastructure giant. Ericsson declared a loss of $1.5 billion (10.8 billion Swedish Kronor) for 2003, compared with a loss of $2.6 billion (19 billion SEK) in 2002 – an improvement of 42%, but a loss nonetheless. Net sales for 2003 dropped a painful 19%, with U.S. sales down an insignificant 1%. However, it posted a modest 2003 fourth-quarter profit of $13.9 million (100 million SEK) on sales of $5 billion (36.2 billion SEK). While one quarter does not make a full-fledged return to profitability, analysts were expecting a fourth-quarter loss.

During a conference call with analysts in February, CEO Carl-Henric Svanberg attributed the good news to revived spending by telecom providers, an observation borne out by the results of the NW200 at large and by good fourth quarters posted by other telco vendors. He even hinted that the market for mobile infrastructure gear might now be stabilized, with steady spending on the horizon. Telecom providers remain the bread and butter for Ericsson, and health in that sector is what lets it spend so heavily on research and development – about 20% of sales are invested this way.

Ericsson, too, has undergone major reorganization. Ongoing cuts from its payroll, including 1,800 employees worldwide in 2003, cost it in restructuring charges. It aims for further cuts, reducing its employee roll by about 4,600 in 2004, Svanberg said.

As Ericsson sees smoother times ahead, it will push mobility and convergence products to U.S. corporations, such as its MD110 convergence platform.

Japan’s largest network vendor is nothing short of an IT conglomerate. Almost half of its $38.5 billion (4.6 trillion yen) in 2002 revenue – its most recent fiscal year – was derived from its software and services division (47%). This division includes everything from CRM/ERP installations and systems integration contracts to managed services. Another 38% of revenue came from the platforms division, including servers, mobile and IP network products, service provider equipment, PCs and mobile phones. Its electronic devices division, including components such as semiconductors and LCD panels, generates the remaining 15%.

Still, Fujitsu had a tough fiscal year 2002, which ran April 1, 2002, through March 31, 2003. It blamed its 7% revenue decline on Severe Acute Respiratory Syndrome and the poor U.S. economy made tougher by geopolitical activity in the Middle East. Fujitsu reported that its software and server groups were profitable (although sales dipped). But restructuring costs, expenses to update hard-drive operations and slumping stock valuations created a $1 billion (12.2 billion yen) loss.

Expect Fujitsu to be pitching lots of software and services contracts. They are high margin and the key to profitability, executives say.

To show its might, private company Huawei Technologies released a statement of its financial results calculated in U.S. dollars. Of course, this statement was voluntary, was unaudited and doesn’t necessarily follow the generally accepted accounting principles to which public companies adhere.

Those disclosures aside, as China’s largest telecom equipment maker, Huawei remains of interest to U.S. companies for several reasons. Huawei reportedly has a goal of garnering 35% of revenue from markets outside China. It hit the 27% mark in 2003, the company says. Huawei also wants to reach $5 billion in sales by 2004. This has led it to compete aggressively, even offering the kind of cushy vendor-financing not seen since the 1990s, and which most public companies can’t match. While sharp competition is good for buyers, it can breed lawsuits. Most notorious was the 2003 lawsuit Cisco filed against Huawei (and embroiling Huawei’s U.S. partner 3Com) that claimed intellectual property theft. The parties settled the dispute in October, freeing 3Com to continue selling Huawei routers and switches in the U.S.

Legal threats didn’t stop others from partnering with Huawei. In November, Huawei and Microsoft (via Microsoft China), created U-SYS Workspace, a collaboration/communications product that bundles Huawei’s hardware and Microsoft Exchange Server. Analysts see the partnership as an effort to gain legitimacy in Western markets.

Nokia is the world’s market leader for cell phone handsets and is known in the network industry for its firewall/VPN appliances. Hugely important to the Finnish company, the Americas region accounts for 20% of overall sales.

Nokia wants to parlay its handset position into leadership of next-generation enterprise wireless clients. In pursuit of that, it announced in February the Nokia 9500 Communicator, a multi-function handset geared toward corporations. This came after Nokia’s enterprise mobility announcements in 2003 on wireless security, remote content management and access products.

In a January restructuring, Nokia created an enterprise unit devoted to selling a range of products enabling end-to-end enterprise mobility. These include its VPN/firewall, other mobile security products, PBX connectivity suites and cell phone messaging products, for instance.

Worth noting is that Nokia invests heavily in research, with 39% of its employees working in R&D and 12.8% of 2003 net sales (3.8 million euros) devoted to this area.

Siemens is a corporate behemoth that makes just about every kind of technical device. Three of its seven business units are IT-related. 2003 revenue for IT operations was $26 billion (22.3 billion euros), on which it declared a loss of $202 million (173 million euros). This compares with 2002 revenue of $30.9 billion (26.5 billion euros) and a $576 million loss (494 million euros).

Information and Communication Networks (ICN) is the IT unit perhaps of most interest to network executives. Siemens U.S. ICN operations include Siemens Enterprise Networks USA, Siemens Carrier Networks, Efficient Networks (acquired in 2001) and Trango Software (acquired in 2000). The U.S. ICN unit logged 2003 sales of $1.3 billion, and while U.S. profit numbers are not available, the worldwide ICN unit posted a loss of $426 million (366 million euros) overall, on revenue of $8.3 billion (7.1 billion euros). Siemens says that the U.S. and worldwide ICN units were profitable in the fourth quarter of fiscal 2003, and blamed the weak economy for the unit’s overall losses.

The U.S. is enormously important to Siemens. It is its second-largest single-country market, after Germany, and headquarters to 11 worldwide business units. Siemens and its subsidiaries employ about 70,000 people in the U.S. and Puerto Rico.

The recent appointment of long-time Siemens executive Andy Mattes as CEO of the U.S. ICN unit shows that Siemens wants to expand its U.S. network business. Mattes wants to make ICN the enterprise choice for convergence and call center wares.