Nortel Responds to Declining Revenues, Unveils Restructuring Plan for 2009

By Mae Kowalke

TMCnet Senior Editor

 

Tough times call for tough choices. That was the tone of Nortel’s third quarter 2008 earnings report, which began by confirming that predictions about effects of “the sustained and expanding economic downturn,” released in mid-September, were accurate and the company must now undergo a round of cost-cutting and restructuring measures.

 

Nortel (News - Alert) posted a $3.41 billion loss for Q308, with revenue down 14 percent year-over-year. Gross margin decreased as well, to 39.2 percent. The company blamed revenue drop on “a challenging economic environment, competitive pressures and reduced spending by key carrier customers,” and the margin decrease on an “unfavorable product mix.”

 

To offset the negative effects of declining revenue, Nortel on Monday unveiled plans for a corporate restructuring, to take effect January 1, 2009. The company will “decentralize several corporate functions and transition to a vertically integrated business unit structure.” This move will give each business unit more financial and operational control, ultimately improving performance and reducing “the duplication inherent in matrix organizations.”

 

Nortel, which offers a variety of networking solutions that support communications applications, currently serves two client bases: service providers and businesses (enterprises). Under the new structure, enterprise customers will be served by a business unit led by Joel Hackney (currently President of Enterprise Solutions). This unit will be in charge of Nortel’s entire communications solution portfolio, along with software and associated services.

 

Service provider customers, meanwhile, will under the new structure by served by two other business units: one for carrier networks, the other for metro Ethernet networks. The former will be led by Richard Lowe (currently President of Carrier Networks), the latter by Philippe Morin (currently President of Metro Ethernet Networks). These two units will be supported by a fourth unit, led by Darryl Edwards (currently President of Europe, Middle East and Africa operations), in charge of sales for carrier solutions.

 

The enterprise, carrier network and metro Ethernet network business units will be free-standing in the sense that each will be in charge of its own product development, marketing, sales, partner/channel management, business development and other functions.

 

In addition to the restructuring, Nortel plans a variety of other cost-cutting measures, including a freeze on most internal travel and most salary increases, re-evaluation of all real estate holdings, and reductions in discretionary spending.

 

Not too surprisingly, the restructuring involves job cuts. Last week, analysts predicted that Nortel would cut 3,000-5,000 jobs. It won’t be quite that bad: the company on Monday said it expects to eliminate about 1,300 positions, with roughly a quarter of those cuts to take place before the end of the year and the remainder during 2009.

 

The job cuts are occurring even at top levels of the company. Those departing January 1 include Global Services President Dietmar Wendt, Chief Technology Officer John Roese, Executive Vice President of Global Sales Bill Nelson, and Chief Marketing Officer Lauren Flaherty.

 

“It is always difficult to see colleagues go, but we made the necessary decision to consolidate our executive layer and reshape Nortel,” said President and CEO Mike Zafirovski, in a statement.

 

The news wasn’t all bad from Nortel, and the company’s head said the strength of its solutions will carry it through.

 

“It is important to note, that despite the business environment, we continued to see important, multi-year customer wins in key areas of our business, validating the value and innovation that Nortel delivers to customers,” Zafirovski said.

 

During Q308, Nortel made two acquisitions with the goal of enhancing its enterprise solutions portfolio. In August, the company completed its acquisition of Pingtel, a Bluesocket business specializing in mobility solutions that were incorporated into Nortel’s unified communications portfolio. The same montht, Nortel acquired voice technology company DiamondWare (News - Alert) to enhance its collaborative solutions.

 

Also during Q308, Nortel bought fiber optic access solutions company Novera Optics, a move that benefits carrier customers.

 

Nortel, headquartered in Toronto, Ontario, Canada, has clients in 150 countries. While its business solutions division has traditionally focused on large enterprises, the company recently began focusing its unified communications (UC) efforts toward serving the small to medium sized business (SMB) market, launching its Business Communications Manager 450 solution. This solution, TMCnet editor Michael Dinan reported, is designed to help companies with 300 or fewer employees “transition from legacy digital equipment,” in the process saving “up to 70 percent of their original IT investment by reducing the hardware they already have.”

 

Also this year, Nortel has stepped up its development of wireless solutions, focusing on both WiMAX and LTE.

 

By combining its global power and comprehensive solutions portfolio with more efficient operations, Nortel appears to be on track to turn around its performance and ride out the economic storm that’s having a negative effect on companies in many industries.

 

“We are acting quickly to become a simpler and leaner company, with the greater flexibility and responsiveness required to manage our business in a rapidly changing marketplace,” Zafirovski said. “We are deeply committed to customers, and are taking the necessary steps to adjust our operating model and become a more customer centric partner that delivers the value and innovation they need to succeed.”

 

Nortel Networks Corp (NYSE: NT) shares were trading at $1.10 as of 9:53 a.m. Monday morning, down from previous close of $1.17.