Nortel shakes off doubts to become network power

It’s amazing what a strong set of accounting books can do for a vendor’s image.

Only two months ago, Nortel was being seriously second guessed by a financial investment community in doubt over Nortel Networks’ US$3.25 billion blockbuster purchase of Qtera, a start up developer of technology (but no real product) for long-reach optical network systems. Then in late January, Nortel proudly announced strong financials for the past year, and the skepticism of misunderstanding about the company’s direction and strategy seems to have lifted.

It’s been that way for Nortel, especially ever since this Canadian networking pioneer set out to become a leading IP network building company some two years ago when it purchased Bay Networks. Many looked at that acquisition with great skepticism and were concerned when Nortel then moved slowly to reveal its strategy and product roadmap for building converged voice and data networks through multiservice IP. There are still some issues around the assimilation of Bay within Nortel, but momentum has been gathering for about a year and, while along the way many questioned Nortel’s acquisition strategy and approach to transitioning the world to IP, the company has steadily climbed up the network building leadership ladder.

The year past from a perception standpoint was mixed as financial analysts seemed somewhat cautious about getting too excited, since most were still struggling to understand the whole notion of convergence and its implications in reshaping the industry. The wind of change always blows hot and cold for Nortel, as confidence in the company’s new direction excites and confounds observers.

But the love affair between Nortel, the financial analyst community and other professed IT gurus was warmly rekindled in cool January. Thanks to a strong financial performance in 1999, all seems right again with Nortel’s market perception, strategic direction and acquisition strategy-at least for the time being.

A stellar last quarter propelled the company to US$22.3 billion in total earning for 1999 — up 26 per cent from 1998. Revenue growth in three key areas was significant. Nortel’s optical business grew by 22 per cent, its access products sales doubled from last year, while mobility products enjoyed “mid-teens” growth overall and a whopping 33 per cent in the final quarter.

Net earnings increased by 58 per cent from last year and earnings per share were up by 53 per cent. Nortel achieved 20 per cent business growth in the U.S. and approximately 30 per cent growth outside of the U.S. and Canada. Business in Asia grew by an impressive 46 per cent, driven by the company’s core data and switching products.

Coupled with the announced financial results, company CEO John Roth then announced yet another stock split would occur-the third in 24 months. It’s a move that will undoubtedly attract more investors by lowering the per-share price of the stock, and add more wealth to the company’s already ample coffers.

Topping off the feel-good festivities was news a day later that holding parent BCE Inc. would spin off its stake in Nortel, and ultimately propel this great Canadian company to realizing its full market valuation potential-which, at the time of writing this column, stood at approximately US$150 billion. It seems everything is going right.

Market perception is undoubtedly having a huge hand in driving Nortel profitability. It, along with Cisco Systems, has done more than most in terms of repositioning itself as a company ready, willing and able to do business in the new world of IP multiservice network building. Each has emerged as clear-cut leaders and, while in truth IP multiservice network building is in its true infancy stage with small uptake at this point, the recognition by IT and financial analysts is that both are best positioned for the future. So far, that perception is drawing both investors and customers.

While all seems generally wonderful at Nortel these days, there are at least two disconcerting aspects to what was revealed during that January financial review. First was news that the company’s enterprise business was judged “disappointing” last year, particularly in Q4, where revenues were down by 5 per cent from the same period last year. In an effort to set things right, Nortel officials pledged a much stronger focus through a more direct touch model with customers, which translates into meaning that Nortel will be much more personally involved in equipment sales, especially with its key customers. Such direct intervention might mean that Nortel relies much less on channel partners to drive its enterprise solutions-at least until this listing ship is righted.

Correcting the situation is critical, since many network hardware vendors now strongly suggest voice/data convergence must be driven through its application in the enterprise space in order to propagate the concept. If one is to believe future purchasers of network convergence equipment in the enterprise space will be those who currently purchase and manage data infrastructures, then Nortel must do a better job of building both relationships and market share among this crowd.

Finally, there was news that Nortel revenues in Canada declined by 12 per cent in the last quarter and that overall growth here was extremely modest-only 5 per cent for the entire year. There was no announced strategy for improving the company’s performance in its own backyard and no reason offered as to why the situation occurred.

Given that Nortel vastly outpaces everyone else in the building of Canadian carrier networks, these poor national results represent a crack in the company’s armour that might eventually result in an all-out collapse if not rectified. The situation in Canada may be attributed to two factors: The emergence by and encroachment of the competition into Nortel’s entrenched carrier customer account base, coupled with the possibility that Nortel’s focus has been drawn away by other efforts to build success in weaker markets. The competition seems to have taken advantage when the company took its eye off the ball, so to speak. Reasserting some stringent focus and taking a much more aggressive approach towards the Canadian enterprise should fix things up.

It’s a lot easier to understand why Nortel is a vaunted network building leader these days, when you look at the financial success the company has achieve during this past year. The numbers reveal tangible proof that the company’s networking story, in most key fronts, is being heard and accepted.