Nortel’s six-point plan part of complete business transformation

Wireless networks will figure prominently in the future of Nortel Networks Corp. as the company announced a commitment to investing in profitable growth areas as part of a three- to five-year process to recreate the company. This was the overriding theme of a conference call Nortel held on March 10 to layout the future of the struggling telecom equipment maker. "We’ve done a significant amount of analysis, which will only increase going forward, identifying activities where we can lead to capture the significant existing upside," said Mike Zafirovski in his first full teleconference since being named CEO of Nortel in November. For 2006, three areas where the company feels it can have a considerable presence are WiMAX, IP Multimedia Subsystem (IMS) and IPTV. "We are at the balance to making the investment where it could really make a difference to our customers and to Nortel." Zafirovski is staying positive, yet realistic, as he and his staff begin a business transformation, which will include much more than just knowledgeable investments. "If you look at Nortel’s assets I would argue most CEOs would kill to have this on their balance sheets," he said. "We’re starting to look at where we’re going to be much more relevant. And the process is started, we’re not going to make any silly decisions overnight just to kick off an objective." On the research and development front, the company will be more strategic and look for more effective R&D spending as well as longer-term investments. Zafirovski noted that R&D will not be cut for those activities which will produce above-market revenue. But he cautioned that if revenues are flat then Nortel will revisit its overall R&D investment activities. Because Nortel will be restating its Q4 2005 and full-year 2005 financial results at the end of April, the company only released preliminary figures during last month’s teleconference. On the wireless side, GSM/UMTS network revenues were up 12% in Q4 2005 over the same period in 2004 and increased 13% to US$2.9 billion for the full fiscal year. Meanwhile, CDMA revenues increased 7% to US$2.4 billion for the year, including a 23% rise in Q4 2005 versus 2004. Zafirovski pointed to the company’s GSM contract wins around the globe including an increased presence in Asia, Latin America, Argentina, Africa and Russia as signs of positive momentum. He added that a large European company ranked Nortel’s UMTS access in the top spot for its network performance ability and availability. Additionally, Nortel’s joint wireless venture with LG Electronics will be beneficial in multiple areas. "We are learning from LG Electronics huge amounts and we anticipate great things in the future," said executive VP and CFO Peter Currie, "but it also affords us an existing distribution channel for our existing product lines….So when we look at our business, we look at them as a composite and don’t segment them out individually." Added Zafirovski: "We’re also leveraging our technology know-how with a new pool of LG and Nortel JV engineers are working quite actively to combine our efforts on WiBRO/WiMAX broadband access, combining key innovations from Korea along our very strong patent position in ODFM/MIMO…technologies." Other signs of momentum in the mobility portfolio include a three-year contract with Cingular Wireless for GSM and UMTS wireless voice core technologies, CDMA 2000 1X 3G network expansions for Vivo Brazil, Telecommunications Services of Trinidad and Tobago and Télébec Mobilité, as well as being selected by the Alberta Special Areas Board to build what is believed to be the first commercial broadband wireless access network in Canada based on the WiMAX IEEE 802.16-2004 standard. IMS, which many believe to be key to making integrated wireless and wireline networks work in the future, will play a big role for Nortel. The company has ongoing trials with a number of major players, as Zafirovski noted. "We started to make some good progress with our IMS solutions. We have two active announced trials at Verizon and Swiftcom, and we have eight other trials underway with very significant customers," he said. Beginning with its financial restatement, Nortel’s business transformation will touch all areas of the company. Said Currie: "The restatement requirement was identified as a result of the process to strengthen the effectiveness of our internal controls and ensure the transparency and accuracy of our financial information." Integrity renewal, which includes fostering ethical behaviours and trust-based relationships within the company, is a building block of the transformation and one that Zafirovski hopes will make Nortel a "beacon of best practices for financial controllership and corporate governance activities." 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. "There is a passion to recreate a great company," he said. "And what’s most exciting is to grow the company, to make it relevant for the customers’ needs." Breaking down the business transformation even further, Nortel unveiled a six-point plan for building investor value. Included in the plan is a "strong positions or out" strategy that will have Nortel targeting a minimum 20% market share for all activities, as well as a two-fold increase in software solutions revenues from their current 15-17% of total revenues. 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."

Nortel’s six-point plan part of complete business transformation

News | April 6, 2006

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