Nortel to quit Ethernet market

Nortel Networks is set to abandon the optical and carrier Ethernet markets as tough economic times forced the Canadian telecom provider to lower third quarter revenue expectations.

Nortel is offering for sale its Metro Ethernet Networks (MEN) as part a significant revamp, according to Mike Zafirovski, president and CEO of Nortel.

“It is clear that the business environment in which we operate requires additional immediate and decisive actions,” Zafirovski said in a phone conference yesterday following the announcement of a much lower business forecast.

“We have taken a strategic position on Mentro Ethernet.”

“The divestiture” Zafirovski said “will allow us to strengthen our balance sheet and invest in areas we have identified for growth.

The company announced that third-quarter revenue for 2008 will be around US$2.3 billion. That figure is a drop from the $2.7 billion earnings from the same period last year and about $60 million less than the second quarter earning for 200.

Nortel said its 2008 revenues will be two to four per cent less than the $10.95 billion it reported for 2007.

Nortel stocks fell by as much as 51 per cent following the announcement.

An economic downturn which is forcing many customers to cut capital expenditure or defer purchase of new IT and optical equipment, foreign exchange pressures on revenues and product delivery delays were the chief reasons behind the revised forecast, said Zafirovski.

He did not give any details on the nature of the delivery delays but instead said “some of our products will be delivered in the fourth quarter rather than in the third.”

Despite this, the Nortel executive said: “We continue to be in a solid cash position.”

Zafirovski said the company’s long term strategy towards restructuring will involved: a focus on its enterprise business; development of carrier offerings such as Voice over Internet Protocol (VoIP) products; cost reduction and “divesting some businesses.”

Apart from the sale of MEN, Zafirovski did not provide further details on Nortel’s other restructuring and cost cutting plans.

Product development and research at MEN will continue throughout the process of searching a buyer for the division, said Zafirovski.

MEN provides optical and Ethernet equipment to carriers and cable operators. The division is credited for 14 per cent of Nortel’s 2007.

Nortel’s ability to deliver 40-Gbit/s signals on 10-Gbit/s infrastructure has been a key behind the company’s Ethernet success. Nortel has been on a winning streak since late 2007 when its Optical Multiservice Edge (OME) 650 was used for the Verizon Business pan-European build out. With a recent deal with BCE Inc., Nortel now has 21 40-Gbit/s contracts.

Recently, Nortel was chosen to provide IP and Ethernet technologies for the 2012 Olympic Games in London.

While MEN is considered one of the leaders in its field, making money from the division has been hard. The operating margin for the first half of this year was minus 1.1 percent for an operating loss of $7.8 million from revenues of $705 million.

Technology analysts, however, are split on whether selling MEN will benefit Nortel.

Nortel’s Ethernet division is an ideal asset to sell off, according to Ian Grant, analyst for the Seaboard Group, a Toronto-based IT and telecom consultancy firm.

“The Metro Ethernet business is relatively solid and continues to grow. It will be fairly easy to find a buyer for the division,” he said.

With the soft North American economy, Grant said, Nortel might expect to find buyers from outside the region. “The market is not just Toronto, Montreal, Boston and New York and buyers are not limited to Alcatel and Lucent.”

Selling assets such as MEN will provide Nortel with the liquidity to “keep and pursue big bets” such as the company’s wireless technology, he said.

Another analyst, however, says selling the metro Ethernet business unit that is doing so well might not be a good idea.

“Selling off that division does not make business sense because that’s one of the growth areas,” said Yiru Zhong, analysts specializing in telecommunications for the firm Frost & Sullivan.

She also said Nortel’s insistence on getting a cash-deal for MEN could possibly rule out a number of companies which might be considered a good match. Zhong said among the possible buyers were cash rich telecom and network firms ZTE Corp. and Huawei Technologies Co., both of China.

The decision to sell Metro Ethernet was likely forced upon Nortel by its financial situation, according to another analyst.

“This is probably one of those decisions made under duress,” said Andy Woyzbun, lead analyst with Info-Tech Research Group Inc. of London, Ont.

The move, Wozbun said, is a clear signal that Nortel will be concentrating on the enterprise space.

He said the Ethernet space is certainly a growth area and Nortel will likely not be selling the MEN division if the telecom equipment provider were not strapped for cash.

“They’re clearly in distress and need to sell something.”

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