Nortel is Back

November 6, 2007

Recently it is has been a mixed ride for communications companies as those relying on tier-one service providers for the majority of their growth have been battered. Case in point is Ericsson and Alcatel-Lucent who each have lost over $15 billion in market capitalization in the last three months alone.

On the other hand companies like Cbeyond and ShoreTel have been fantastically well as they focus on the small business market exclusively.

Enter Nortel, who has a mix of products in its portfolio serving enterprise customers as well as service providers in the wireless and wired spaces. The company’s shares have been decelerating since early in 2004.

So Nortel’s prospects for beating earnings this quarter were less than clear. Would they have a great quarter like so many technology names with worldwide exposure or would they have a terrible quarter like both Ericsson and Alcatel-Lucent?

Well the results are in and the news is very good as the Toronto-based company said it had net income of $27 million or 5 cents per share in the third quarter. This compares to a net loss of $37 million, or 7 cents a share, in the second quarter and a loss of $63 million, or 14 cents, a year ago.

The news was enough to make the company’s stock pop 18% today.

Similar to its rivals, the company did see sales fall 8% from last year but thanks to cost-cutting, profits increased.

Some of the areas of growth are 4G networks, Metro Ethernet, WiMAX, unified communications and telepresence. According to a conversation I had with Joel Hackney, President of the Nortel Enterprise business, customers are responding to the company’s telepresence solutions because it is open, working with equipment from other manufacturers. Hackney contrasted this to Cisco’s solutions which require all-Cisco equipment.

Probably the most important takeaway from the day’s news is the company is furiously investing in R&D and sales personnel to move product. In addition, Nortel has regained positive financial momentum.

In the future, Nortel is betting big on the enterprise space and Hackney says CIO relationships remain strong and the company gives 40% greater value than Cisco. He says data and applications growth are accelerating. You may recall I suggested Alcatel-Lucent refocus on the enterprise space back on September 13 of this year.

Nortel has been known as a strong technology company for many years and in the last few years they were weakened by poor financial performance. This strong quarter coupled with close ties to Microsoft and IBM in the unified communications space has really turned the prospects of the company around and if Nortel is able to execute on its ambitious growth plans it could soon become a consistently fast-growing communications equipment manufacturer once again.