Nortel's Financial Firestorm: Implications For I&O Clients

Lisa Nortel’s future does not look bright. It admitted to huge financial reporting misstatements in 2002 and 2003, and the Canadian federal police are pursuing the former CEO, CFO, and comptroller for fraud. Nortel has lost more than $7 billion since CEO Mike Zafirovski took over in 2005. Competitors like Cisco and Juniper have been gaining share and new ones like Huawei have emerged. Since 2005, Cisco’s revenues have grown by almost 60%, Huawei’s have more than doubled, and we estimate that Juniper’s revenue has grown by well over 40% over the same three year period.  In contrast, Nortel’s revenues have declined.  During this time, Nortel’s share price has dropped by 90%. Nortel is losing share in the IPT market and the overall economic climate will clearly affect telecom hardware purchasing. All of this makes Nortel’s recovery even more difficult ¬— despite having $2.4 billion in cash on hand.

We anticipate that Nortel will continue to divest one or more lines of business.  For instance, it sold its GSM and 3G business unit to Alcatel in 2006. Some are speculating that its CDMA business unit could also be sold.  It will very carefully consolidate future R&D investments into products it sees as the most likely avenues for future growth. On the enterprise side, Nortel executives plan to continue focusing on Unified Communications, but on a call with Forrester analysts on January 15, they declined to provide specific plans or even timeframes for when those plans will be shared.

As a global “top five” provider in business and enterprise communications, Nortel has a sizable customer base that will not quickly disappear. However, if you are a Nortel customer, Cisco, Avaya, and Microsoft will probably be calling soon looking for your business.

If you are not currently using Nortel as a vendor, don’t start now. If you are considering a substantial additional investment in Nortel gear, hit the ‘pause’ button until its specific going-forward product strategy and product support strategy are clear.  If you are adding to your Nortel base in a small fashion — e.g. incremental phone or line card change outs, etc —  there’s no reason to stop. Continue to work with Nortel services partners for upgrades. Nortel’s extensive market presence and sound technology makes it highly likely that support and services for its installed base will continue through this difficult time.

If you are a customer on the enterprise services side and are considering using a new managed service that includes Nortel CPE, ask the MSP about other CPE vendors in its line-up. If you are planning to use a new telecommunications or WAN service whose underlying network is heavily dependent upon Nortel infrastructure, hit the ‘pause’ button until the service provider’s going-forward product strategy is clear. Finally, if you are using legacy services that use Nortel infrastructure, there’s no reason to jump ship.  But you should also question your service provider about its going-forward strategy about this part of its infrastructure. If you are considering switching providers for legacy services, make sure their RFPs include questions on underlying infrastructure vendors, financial strength, and going-forward strategy.

By Lisa Pierce and Elizabeth Herrell

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