Break-up talk swirls as Nortel hits losses and job cuts

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Break-up talk swirls as Nortel hits losses and job cuts

By CAROLINE GABRIEL

Published: 11 November, 2008

READ MORE: Nortel Networks | Financial

Nortel announced its worst loss in seven years, with a US$3.41bn deficit, and did the only thing it could to reassure shareholders, announcing speedy action to meet the crisis, with a massive restructuring that will cost 1,300 jobs and return the Canadian company to a vertical business unit structure.

CEO Mike Zafirovski focused on the general business climate rather than Nortel's specific and long standing problems, and sought to make a virtue out of necessity by talking up his company's readiness to face the challenge of the downturn and take pre-emptive action. But many analysts remained unconvinced that the company is actually taking sufficiently drastic action, and revived speculation that Nortel will exit the wireless infrastructure business to focus on carrier IP and its strongest activity, enterprise systems.

Zafirovski painted a bleak picture of the carrier spending landscape, saying carrier CEOS had "chided me for possibly portraying the picture as more negative than they were seeing internally. ...Two to three weeks later, the CEOs called back to say, 'On second thought, we're taking costs down as well.'"

The devastating loss was largely down to one-time non-cash charges of $3.21bn, made up of a $1.14bn goodwill writedown against enterprise and carrier business assets and a $2.07bn revaluation of deferred tax assets. Last year Nortel reported a profit of $27m. But other metrics were gloomy too, in a quarter when other infrastructure vendors like Ericsson, though cautious about 2009, are still showing fairly robust results. Revenue fell 14% year-on-year to $2.32bn, in line with revised September guidance, and margins are falling fast - gross margin was 39.2%, down from 43% in Q3 last year, and 43.1% in the second quarter of 2008. Nortel blamed this particularly worrying figure on an "unfavorable product mix" but said margins for the full year should still reach 42%, on revenues of $10.51bn, which would be 4% down on 2007. Given the global economic downturn, though, the company noted that "actual results may be lower than these current expectations".

The restructuring will cost 1,300 jobs, on top of the 1,200 announced in February, which will reduce headcount to 28,500 and will incur charges of $130m, while saving $190m a year in costs - about half of the $400m in savings the company is targeting with its efficiency program. This also includes salary, travel and new hiring freezes, and re-evaluation of real estate. Some analysts had looked for 3,000 new job reductions, and commentators at Canada's National Bank Financial speculated that Nortel might now sell off all of its three new divisions in a total break-up.

The current matrix management structure will be scrapped in favour of a decentralized system with three standalone business units, which will have greater autonomy - good news, potentially, for the Enterprise unit, the most successful performer in Q3. Like Motorola, Nortel sees this as a bright point, but of course comes up against the might of Cisco if it chooses to rely too heavily on this market. As well as enterprise, the other two units will be Carrier Networks and Metro Ethernet Networks. Nortel is looking for a buyer for MEN, and is widely rumoured to be prepared to sell Carrier Networks too, which would leave it focused on unified communications and IP.