After several layoff announcements over the last couple of years, Nortel Networks Corp.’s customers and investors have every right to be nervous about the company’s future, according to one industry observer.
The Brampton, Ont.-based firm last month revealed that it would slash 7,000 jobs, and that it expects revenue could fall by as much as 10 per cent in the third quarter.
Kevin Lo, technology analyst with Lightyear Capital Inc., an investment firm in Calgary, said customers and investors might be thinking twice about dealing with Nortel.
As a customer, “I would be concerned,” he said, adding that users prefer financially viable companies. After so many layoff announcements, Nortel appears anything but.
“I would look around and say, ‘Who’s most financially stable? Who’s going to be around for the long haul?’…Unfortunately I don’t know if that’s Nortel.”
Investors are no more enamoured with the firm than customers are.
“This is the seventh round of layoffs. When you look at that as an investor, you wonder, why couldn’t they have done it the first or second time around? Seven rounds? What’s the likelihood of them doing it an eighth time? It suggests they don’t know how to turn their ship around.”
Nortel’s CEO Frank Dunn reportedly said when he took the helm that the company would quit cutting jobs. Lo pointed out that this is the second round of layoffs announced on Dunn’s watch.
Joe Greene, an Ottawa-based analyst with IDC Canada Ltd., said Nortel’s woes might stem from misplaced confidence.
“They were assuming the end of the downturn in the industry would have already hit the bottom. A lot of their previous layoffs were predicated on that.
“We’re not as optimistic as that,” Greene continued. “We don’t think the downturn will hit bottom until 2004. Our take is Nortel is just finalizing what should have happened months ago.”
The company’s poor performance in certain sectors does not aid its cause.
“They’ve not been as successful as they would have hoped in the enterprise segment,” Greene said, adding that Nortel purchased Bay Networks in an attempt to shore up its enterprise offerings, but ultimately the company’s core audience remains the currently dismal telecommunications sector.
Lo said vendor consolidation is in the stars and Nortel – as is – might not survive the ensuing shakeout. Despite technical merits that give “the company some intrinsic value,” Nortel could end up merely the division of another stronger telecom gear maker.
“They know all their sales are declining,” Lo said of Nortel’s competitors. “The only way to be effective is to consolidate their R&D teams, some of the upper management, and keep the customer base.”
Although Nortel is staying mum on where its latest rounds of cuts will occur, rumours about where the company’s axe will fall – and what that could mean for Canadian R&D – are flying.
Close to 45 per cent of Nortel’s global R&D workforce is based in Ottawa, leading to concerns that the Nortel cuts will have a significant impact on the Canadian R&D market.
But Dan McLean, director of outsourcing and IT utility research at IDC Canada Ltd. in Toronto, noted another fact to be taken into consideration.
“The other side to the coin is that you’ve got a lot of R&D that’s being moved up into Canada,” he said. “Companies like Microsoft are looking at Canada as an area where they can draw upon a good base of talented people for their R&D efforts. So I don’t know that even if Nortel decides to pare some of their research and development in Canada that it necessarily cripples the Canadian industry.”
While some reports indicate senior management positions will be affected by the cuts, McLean said they would likely be based on the firm’s product lines.
“I don’t believe that [the cuts] will be in their areas of wireless and fibre optics. I think that once the company sees better days that those two areas are going to be pretty key for them.”
Carriers are really taking a look at wireless right now, McLean explained. Nortel has a lot of great fibre-optic technology, so these are areas that are likely safe. He added that IP is another facet of Nortel’s business that likely won’t be affected.
“I think pretty much all other areas of the company are at risk in terms of product areas. I would also suggest that their traditional telephony communication areas, their circuit-switched areas, are probably most highly at risk because that’s technology that is being phased out. It’s the technology that is sort of coming to an end and being replaced by a lot of IP-based stuff.”
A Nortel spokesperson said details surrounding the latest workforce reduction would be revealed in October.