What are the facts?
Nortel filed for chapter 11 bankruptcy protection on January 14th, 2009. This move was widely anticipated based on their inability to meet current and anticipated debt obligations and a desire to seek creditor protections while attempting to undergo a major restructuring effort and return to “normal” operations. What constitutes normal operations for a post bankruptcy NT is up for debate, but an attempt to focus on/retain the enterprise communications business has been widely speculated.
Yankee Group’s view?
It is prudent for Yankee Group to take a “wait and see” approach on Nortel until a clear picture of what further restructuring, headcount reductions, and divestiture of non-core assets will yield in terms of ongoing working capital. In Q4 it was estimated that the cash burn rate would give them 12-18 months of operational runway. We anticipate this may marginally improve if key assets are sold and/or they can secure additional capitalization [i.e. through a CN government loan].
Nortel’s Current Structure Conducive to Sale
Nortel is currently structured in a way that is conducive to a break-up, with carrier networks, metro Ethernet, and enterprise solutions business units. The global services unit will be decentralized into the three business units by the second quarter of 2009. I’ll make some comments on each of the business units in the next section.
Carrier Business Unit
The long-term impact of Nortel’s problems will be most pronounced, in our opinion, within their carrier focused segment. On the 4G front, NT just announced their exit from the WiMAX business and backing out of their strategic partnership with Alvarion as a result. This was due to poor unit performance and the declining prospects for WiMAX as a legitimate competitor to LTE or even HSPA+ for mobile broadband access.
Thus far, NT’s largest customers including Bell Canada, Verizon Wireless, and Sprint have indicated that they will stay with NT for the short term but we do not view this situation to be static.
Nortel has made a concerted effort to get “out in front” of the LTE market to provide a pole position for it to sell LTE migration solutions into its install base of CDMA. The CDMA business, while still large, is in a steep decline. Yankee Group gives its prospects in LTE very little chance for success–there is simply too much perceived risk with partnering with NT on LTE which is still 2 or 3 years away from wide deployment. We expect the benefactors to be ALU/Ericsson/NSN/Huawei as they begin to encroach into NT’s biggest customers, in particular in LTE.
Metro Ethernet/Optical Business Unit
The most valuable remaining piece of Nortel is the Metro Ethernet/Optical business [which has created operating profits in some quarters but had uneven performance] which has been for sale for several months without a deal being struck. Nortel needs the cash to fuel further operations but with the economic downturn it has been difficult to locate a suitor willing to pay what they believe it is worth. Huawei is speculated to have interest, other names have included Ciena and Cisco.
Enterprise Business Unit
If Nortel successfully divests its carrier and Metro business they will be left with an enterprise communications business which is also under tremendous competitive pressure from companies led by Cisco, Alcatel Lucent, Shortel, Mitel, Avaya. They have recently announced a new family of 10 Gbps Ethernet switches and tout their relationship with Microsoft on Unified Communications as a key asset. This unit delivered 616M in revenue for the Q3CY08.
Conclusions
These are the worst of times for Nortel, once a telco bell weather organization and the the pride of Canada. We are not bullish on NT’s long term prospects for success, in particular within the telecommunications segment given the bankruptcy proceedings and global downturn. What is unclear is whether they can even survive as Nortel. The impact on customers will largely be determined by how NT emerges post bankruptcy and to whom key assets are divested and in what form. Nortel’s competitors stand to benefit the most from its demise but they too are under the economic challenges that has dealt a potential death blow to Nortel BUT were not as weak going into the downturn and therefore more resilient to come out of it intact. This is one prediction we are not happy to see come true.