Enterprise still crucial to rebound, says Nortel

Once again, Nortel is counting on its enterprise operations to help lift the company out of its financial doldrums.

Nortel recently updated the press and analysts on its progress during the first six months of President and CEO Mike Zafirovski’s tenure with the company. Among the key points was a reiteration of the important role Nortel’s enterprise business plays in the company’s rebound from restating years of financial results after an accounting scandal in 2004.

“We do believe we have a real chance to be strong in enterprise,” Zafirovski told analysts during a conference call. “Enterprise is an area we certainly are very committed to.”

That same commitment was espoused by ex-CEO Bill Owens when Nortel restructured almost two years ago. Owens departed last fall, but Zafirovski is moving forward with the enterprise mantra.

Zafirovski says Nortel can use its heritage in voice, its leading position in IP telephony and installed base to boost its profile in corporate environments and become a leading provider of next-generation infrastructure components. Zafirovski has also set goals for Nortel to claim 20 per cent of the markets it deems strategic over the next three years.

That might be tough in enterprise. While Nortel is a leading provider of enterprise telephony, shipping the most PBX lines over the past two years, it is second to Cisco in the proportion of PBX business generated from IP, according to research firm Dell’Oro Group. Dell’Oro says Nortel is on track to generate more PBX revenue from IP than TDM over the next couple of quarters.

And though Nortel also is second to Cisco in Ethernet switching, it is a distant second. Nortel had less than five per cent of the 2005 worldwide Layers 2, 3 and 4-7 switched Ethernet market, while Cisco accounted for 71 per cent, according to Dell’Oro.

Analysts say it will be close to impossible for Nortel to build that share up to its goal of 20 per cent.

“What’s happened in the enterprise is Cisco’s gotten a lot stronger, Avaya’s gotten a lot stronger in voice, HP has on the data side, and [Nortel’s] gotten weaker,” says Zeus Kerravala, an analyst at the Yankee Group. “The products are okay, but when you go through as much management [and structural] change as they have, it takes a while to do that and it’s hard to do all of those things at once.”

Competitors also have been exploiting Nortel’s tenuous financial position, citing the restatements and operational turmoil enveloping the company for years, Kerravala says. “Corporate viability is an important part of purchase decisions,” he says. “In data switching and routing, it’s going to be difficult for them to hit that 20 per cent number with the number of strong players” in the market.

Nortel is also exiting some product programs and scaling back others, which might also give enterprise buyers pause. The company ceased or canceled activities in six product areas over the past six months, which represented US$73 million in R&D in 2005.

Zafirovski declined to identify all of them during the conference call. “We will not go public with every single product decision,” he said. “This is a normal course of business. In my 31 years in business, we have never provided that level of granularity.”

Nortel reduced its activity in three product areas, cutting R&D from US$80 million in 2005 to $39 million in 2006. It also sold or has for sale two product operations that accounted for $11 million in R&D in 2005, Zafirovski said. One of them was the company’s blade server business.

“Nortel has to transform the way it operates,” says independent telecom analyst Jeff Kagan. “They have a plan, but they still have to make it work. They still have a very tough job ahead of them while the industry moves forward very quickly.”

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