Protection hasn

In its first financial report since filing for bankruptcy protection, Nortel Networks showed mixed results.

On the one hand the company said Monday its revenues plunged 36 per cent from the previous three month period, pulling in $1.7 billion (all figures in U.S. dollars) for the quarter ending Feb. 28 and resulting in a net loss of $507 million.

Sales were down in each of its four divisions, which company CEO Mike Zafirovski blamed on the “severe economic downturn and our filings for creditor protection.” If the negative impact of foreign exchange fluctuations were excluded, the decrease in revenue would have been only 29 per cent. By comparison, last week Cisco Systems reported its net sales dropped just under 10 per cent to $8.2 billion, down from $9.1 billion for its latest quarter. Net income was $1.3 billion.

On the other hand, the company still managed to increase its cash balance to $2.48 billion, primarily due to cash from operating activities of $202 million.

As a result, Zafirovski could put a positive spin on the numbers, arguing “revenue has stabilized and our cash balance is stable from year-end 2008.” “We accomplished our initial objectives of maintaining our customer commitments and strengthening our operational performance,” he said in a news release. “Network performance and customer service levels are at multi-year highs and customers are expressing their support of Nortel. Our employees have done a tremendous job under challenging conditions.”

However, in a research note analyst Kris Thompson of National Bank Financial pointed out that the results are bad news for creditors and good news for competitors looking to pick up assets. “Successful acquirers of Nortel’s assets will be the benefactors as offers are likely being marked down significantly on this revenue trend,” he wrote.

For example, Thompson had estimated Nortel’s enterprise telephony division could fetch CDN$400 million. Now, with sales down and the world economy in recession, he thinks it will bring in about CDN$250 million.

Nortel has been trying to sell assets since last fall, when in September said its Metro Ethernet Networks division was available and in November announced another restructuring of three other divisions. At the time it described that move as a decentralization to give greater financial and operational control to the business. Indeed it did manage one sale, of application acceleration products to Radware.

However, today’s news release for the first time described the goal as to create independent “standalone businesses” of the four divisions – Carrier Networks (which includes wireless networks as well as carrier VoIP and application solutions or CVAS), Metro Ethernet Networks, Enterprise Solutions and the LG-Nortel joint-venture.

In March it was first reported that Nortel was looking beyond a mere restructuring.

Creating divisions that are largely standalone would help make them more saleable, or, in the company’s words, “will provide Nortel with maximum flexibility to choose the ultimate path forward for each of the businesses.” However, Nortel spokesman Mohammed Nakhooda suggested little should be read into the inclusion of the word “standalone” and that it is not a signal Nortel wants to break up the company. At the same time, he said the company retains the right to be flexible.

“We said we were going toward that path [of independent business units] in 2008,” he said in an interview. “Decisions have not been taken and we continue to evaluate our restructuring alternatives. We have held discussions with outside partners and the industry requires consolidation to be competitive. But in parallel we’re building in maximum flexibility into the structure by continuing what we started in 2008 and moving to standalone vertically-integrated … and allowing the businesses to be self sufficient and operational on their own if required.”

Nortel has yet to file a restructuring plan with the courts in Canada and the U.S. Last month it got an extension of protection to July 30.

By division for Q1, carrier networks revenues $737 million, down 47 per cent from the previous quarter. The majority of the decline was due to a drop in spending by operators on wireless equipment; enterprise solutions revenues were $395 million down 34 per cent; metro Ethernet had revenue of $360 million, down 21 per cent. Excluding foreign exchange fluctuations, the drop would only have been six per cent, the company said; and the LG-Nortel partnership pulled in $188 million, down seven per cent.

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Jim Love, Chief Content Officer, IT World Canada

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Howard Solomon
Howard Solomon
Currently a freelance writer, I'm the former editor of and Computing Canada. An IT journalist since 1997, I've written for several of ITWC's sister publications including and Computer Dealer News. Before that I was a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times. I can be reached at hsolomon [@]

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