Nortel Struggles to Rebound, Build Sales

Vendor delays optical switch, warns that hitting Q1 goals will be difficult

Story by Michael Meehan

FEBRUARY 18, 2002 ( COMPUTERWORLD ) - Nortel Networks Corp.'s attempt to recover from the huge losses and revenue declines that have been plaguing it didn't get any easier last week.

The Brampton, Ontario-based telecommunications and networking equipment vendor announced bad news on three fronts. For starters, Nortel revealed that it does not yet have a delivery date for a new high-end optical switch with support for multiterabit data rates.

The company also warned that it could have trouble hitting its first-quarter revenue target. Nortel CEO Frank Dunn said in a statement that sales are softening because of "even more resolve by customers than originally anticipated to minimize spending in the near term." As a result, he said, meeting the first-quarter plan will be "more challenging."

In yet another disclosure, Nortel said Terry Hungle gave up his job as the company's chief financial officer after the firm learned that he had made personal investment moves involving its stock prior to two announcements last year. Dunn, who was CFO before becoming CEO on Nov. 1, will manage the company's finances on an acting basis.

Analysts expected to see Nortel's OpTera Connect HDX switch by the end of 2001, but the firm now expects to start shipping it in the first half of this year. While it's bad form for a vendor to fall behind schedule on deliveries, analysts said, the delay of the new switch underscores the uncertain business outlook Nortel and its networking rivals are facing.

"Times have changed," said Zeus Kerravala, an analyst at The Yankee Group in Boston. "People don't buy technology because new technology's out. You need to give them a solution that either makes them money or saves them money."

What's at Stake

Steve Leaden, president of consulting firm Leaden Associates Inc. in Washingtonville, N.Y., said the last thing any networking vendor needs in this market is to get a reputation for selling buggy products.

"I'd rather see them make sure they've got it right than see them rush to make an announcement [just] because they think the market expects an announcement," he said.

During the current quarter, Nortel's sales are expected to be about 10% below the $3.5 billion revenue level the company reported for the last three months of 2001.

But Nortel, which lost $27.3 billion last year, said it still expects to see a gradual rebound in sales starting in the second quarter. The company also repeated an earlier prediction that it will return to profitability in the fourth quarter.

During a meeting with financial analysts in New York last week, Dunn said Nortel will maintain "a laserlike focus" on a pared-down portfolio of high-margin products aimed at the 50 largest telecommunications carriers worldwide.

George A. Chidi Jr. of the IDG News Service contributed to this report.