Nortel to transform itself, IP to be key focus in the future

Internet Protocol-based networks will play a key role in the future of Nortel Networks Corp. as the company embarks on a three-to-five-year process to recreate itself. The Ontario-based firm has decided to invest in areas where potential for profitable growth exists. Mike Zafirovski, president and CEO of the struggling telecom equipment maker, noted during the year-end financial results conference call with analysts that the company is going to push hard in the areas of WiMAX, IP Multimedia Subsystem (IMS) and IPTV. He added activities in these areas were identified after careful and extensive analysis. But the company isn’t going to continue to invest in areas that don’t pull their weight on the balance sheet, and Zafirovski noted that research and development spending levels could change in the future. "If revenues stay where they are, we’ll be spending much less than $1.9 billion in R&D and that is part of the business transformation which we are currently going to deliver proved results in the short term and to have a great business in a three-to-five-year period," he said. As one of the first moves to improve R&D efficiency, the company merged its carrier data and enterprise data teams into a single organization. The announcement was made on March 20. "The formation of converged data networks strengthens this commitment by enabling Nortel to increase investment synergy across all products in the data portfolio to provide higher value solutions for both sets of customers," reads the news release. Revenue from the carrier network business was $802 million in the fourth quarter alone, up 17% year-over-year and 2% sequentially. For the year, carrier packet networks revenue was up 11%. Zafirovski pointed out that revenue from TDM systems was flat and that for the first time VoIP revenue surpassed that of TDM. On the enterprise side, revenue was equally as strong with a 13% increase. But he noted the company could be doing better on the carrier side of the business. "On the carrier VoIP side we have products that are the best in the world and we’ve not done a good job of communicating that we are bringing carrier-grade VoIP solutions into the enterprise space," Zafirovski said. Future success for Nortel will depend on the successful execution on its six-point plan aimed at building value. A key tenet of that policy is a "strong positions or out" strategy where the company will target a minimum of 20% market share for all activities. Nortel will also look to increase two-fold revenue from software solutions from current levels of between 15% and 17%. Six teams have been created to simplify Nortel’s business, expand its operating margin and generate new revenues, focusing on: services and services operations; supply chain; revenue stimulation; general and administrative; research and development effectiveness; and organization. The seriousness of the project is emphasized by the fact that 80 employees have been assigned to work on it full-time, and Zafirovski added that the team leaders are the most respected individuals in their areas. The business simplification is expected to improve the company’s operating margin by $1.5 billion by 2008. Signs of the business transformation have already taken hold as the telecom equipment maker recently unveiled a new set of simplified commercial service offerings including VoIP and IPTV, security consulting, hosted services, subscriber quality of experience, and multi-vendor repair. But simplified services do not guarantee a business turnaround, and the question of whether Nortel can turn the corner in 2006 was put to Zafirovski during the conference call. He feels the company has finally emerged from the hole it dug for itself, and is ready to move forward. "I do have a high appreciation sensitivity for some of the bold statements which we’ve made since having moved to this company," he said. "Although this will not be smooth sailing every day of the month, if you will, there’s a nice momentum within the business." PEC Solutions, a company Nortel acquired last year, will also be key as the company tries to better address the government market. Noting that the purchase gave Nortel added systems integration and project management expertise, Zafirovski said the acquisition "was also to allow us a more effective channel for distributing our existing products and technology into a market we had not been effectively serving in the past." For more information Nortel Networks Corp.’ business transformation and how it relates to the company’s wireless business, refer to the April 6 issue of Network Letter affiliate publication Report on Wireless.

Nortel to transform itself, IP to be key focus in the future

News | April 12, 2006

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