We’re No Shrinking Violet Says Nortel’s Carrier Chief

Nortel is an interesting company from the perspective that they have an inherent advantage in their product development as they cater to two separate markets – enterprise and carrier, which need similar products. The company can afford to easily sell carrier-class products to enterprise customers making them more reliable than what many competitors offer.

But all the advantages in the world don’t mask the company’s recent earnings which were below expectations with carrier revenue down 24% and they certainly can’t easily offset the billions of dollars of debt the company has.

I said this in a recent post:

By not meeting with people on this side of the “house” I am now wondering in hindsight if part of the problems in the service provider business has to do with lack of leadership and the absence of a highly visible spokesperson/evangelist.

Recently I did get a chance to speak with Richard Lowe (pictured), Nortel’s President of Carrier Networks. And Lowe did a spectacular job addressing my questions and seems to be a great spokesman for the company. Also on the line was Bruce Gustafson, Director of Marcom, Carrier Networks. I hope to speak with Lowe regularly to help gauge the company’s progress and answer questions you may have.


Lowe handles all of the company’s wireless business including CDMA and as he mentions, this technology is used by Verizon, Sprint, US Cellular and Alltel. He also handles the GSM business – supplying products to T-Mobile, France Telecom and he also handles the WiMAX and LTE business. He further manages the carrier VoIP and applications solutions portfolio of products.

Lowe volunteered that the press has talked about how the telecom industry is seeing earnings estimates cut anywhere from 5-12%. He further said, “Next year promises to be a tough CAPEX year for service providers and we’re feeling our way right now in terms of what that business forecast is going to look like.”

He transitioned into the importance of the division he handles by explaining it is a large and profitable part of Nortel. “If you look at our results at the end of the third quarter and year to date, the business runs in the high teens operating margin, he said. Other comments of interest are the company is number two in CDMA globally and although he says Nortel has a smaller share of the GSM market, his company services 8 of the top 10 mobile operators.

On the wireline side he says the company is number one in the world in carrier VoIP and powers 100% of the Verizon network and a large part of Embarq, AT&T and alternative operators in Europe. He concluded, “It’s not like we are a shrinking violet in this space at all, but as service providers decide not to spend, then we’ll maintain our share of wallet but it’ll be challenging our top line over the next 12 months.

Continuing, “So that gives you sort of a framework of business. We are trying to keep our head down and tail up here and focus on what we can control and not overreact to what comes out in the trade press or newspapers. But clearly some of our investors are anxious and some of our customers want reassurance that Nortel is still a viable entity.”

He further explained he spends a fair amount of time talking to the press and customers discussing his company’s strategy and challenges they face.

I asked how the conversations go and he told me in general the customers want Nortel to be successful. The company has been around over 110 years he said and they have historically been a carrier company taking part in the digital revolution in switching, the optical revolution in transmission and the wireless revolution in mobility. “People like our innovation and technology,” he concluded.

He said when he talks to customers he does not sidestep the challenges but states the facts as best he knows them. He tells me this provides a general reassurance to customers that they aren’t “flopping around” like a fish on the pier — so in general these conversations are going quite well he added.

He then went on to tell me he was recently in China talking to the top folks at China Telecom where they landed a contract to extend the CDMA network in that country. He tells me the customers were happy and that he is pushing the supply team hard to keep up with the demand for CDMA technology in the most recent home of the Olympics. From there he went to Japan to speak with KDDI where he recently won a 4G core contract in partnership with Hitachi – where they beat out formidable competitors. He says this is an external proof point showing how good the company’s technology is and further shows that people want to buy from them.

I told him the question most of my readers have asked me is what the viability of Nortel is and whether it is safe to buy. I further asked about the fact that there is talk of Nortel being split up and if this happens, what would happen to customers?

The response was that the company has been transparent in their consideration to divest their Metro Ethernet Networks (MEN) business. He further went on to say the company recently restructured and took a billion and a half dollars of cost out. But clearly the economic situation has pushed them to consider divesting other assets and they may be sold off if the company gets the right price he says.

He went on to say, “Our customers want assurances that we are going to continue to service their networks and we’re going to continue to develop the technology they need and I have provided those assurances to my large customers like Verizon and I have every intention of continuing to service their needs and honor the contractual obligations I have with them.

He said it is a different discussion if you end up using terms like “breaking up the company.” He said, “Our plan of record is to absolutely continue to focus on our wireless technologies and continue to leverage the earnings we get from them and to partner in LTE and 4G because I think it is going to be very very expensive to do that [invest in these areas] on our own. He further says they will be able to grow the carrier VoIP business. He said it has been a tough market in 2008 – “We haven’t lost share,” he says. He added, we have heard the woes from the likes of Sonus, NSN and Alcatel-Lucent. He does however think there is growth in carrier VoIP – whether it is in trunking, Class5 replacement or unified communications where they are applying the principles of the enterprise business into carrier hosted solutions.

He went on to say the [enterprise and carrier] platforms are very similar and will be converging over time.

Furthermore, there are opportunities in applications such as FMC and network enablement. He thinks these markets will take off and Nortel is in a position to take advantage of this growth.

The key to growth for Lowe is service and he says “I am going to service my existing customers the best way I know how and they are giving us g
ood checkmarks around our network performance, around our support of their networks and around our ability to hit our plan of record.”

The reason for this relentless focus becomes obvious when he goes on to say carriers are telling him if you want to do business with us in 4G, service our 3G networks. According to Lowe, operators are saying Nortel is doing a great job servicing them. They are also keenly interested in learning about the partnerships the Canadian-based company is exploring as well. He says the moment these customers feel Nortel is not able to service them effectively, they will look for alternatives.


Gustafson (pictured) added that the customer relationships on the carrier side are really long-term – some going back twenty years. He says it is not like these customers take a snapshot of Nortel today – “We have dealt with them for a long time, we have built relationships, they understand our equipment and it is well-embedded in their networks.” He continued, “It is a long sales-cycle and customer relationship.”

In a sign that profit is becoming more important than marketshare, Lowe said Nortel will be more selective in the future – looking for business that doesn’t lose money and is accretive. He went on to say that Eastern Europe and Africa are two places that are doing well. This verifies similar comments about Africa made by Harris Stratex CEO Harald Braun but conflicts with his comments on Europe.

But getting back to Nortel, the company is winning service provider customers worldwide. This prompted me to ask about the incredible advantage the company has in developing products once and selling them in the enterprise and carrier markets. I further mentioned they are winning customers albeit in a more challenging financial environment. I asked if the problem the company feels it has is the legacy debt and financial issues of its past. Obviously there are challenges… What is the explanation for those challenges I asked.

Lowe confirmed the advantage the company has is being able to leverage technology across market segments and they leverage these opportunities as best they can. He said, “I don’t have a large number of operators and if one of those operators decides that they are in a position where they can’t spend… Their CAPEX drops by 60% on a year-over-year basis; it clearly has an impact on the overall carrier business.” He continued, “And that’s exactly what happened in my CDMA business.” He said a large US operator was expected to spend at a certain level and didn’t, affecting the performance of not only Nortel but other companies in the space, mentioning Alcatel-Lucent and Motorola. He further went on to wonder aloud if this carrier will recover in 2009 and spend to its historical levels – in the networks Nortel has with them.

He did say a large number of carriers are slowing their spending in CDMA… they have deployed 1x he mentioned for voice and have their first EVDO deployments in place for data. He says they will be looking for this line of business to decline perhaps 5-10% a year.

He further explained that ROI parameters are getting more challenging so operators are slowing their CAPEX investments which would be used to upgrade TDM to VoIP. He says these operators will hold onto their Class 5 switches longer than originally planned… As long as it continues to support the traffic he explained.

On the GSM side he mentioned his company is sensitive to the installed base which is converting from GSM to wideband CDMA. He then went on to discuss the fact the company sold the 3G access business on the GSM side back in 2006 and therefore, Western European carriers who are converting will buy less GSM from them and more wideband CDMA from their competitors. Continuing, he explained, “My GSM business will see a larger decline than the overall market because of this phenomenon.”

I asked if in hindsight if it was not the best move to sell this business line and in response Lowe said he loses no sleep over this decision. He said the customers voted and decided that Nortel did not have enough marketshare in the space at 6-7% to be a viable equipment provider to them. He went on to explain the company was ahead on the infrastructure side and at one time had 20% of this market. The problem was the devices were two years behind the infrastructure.

The problem for Nortel as he articulates is the incumbent equipment providers were able to catch up to them during the time when the carriers were waiting for the devices. He concluded, “The incumbency won out,” leading me to think, as it so often seems to.

He further went on to explain that after selling this line, the carrier business operating margin went from 9% to 19% in a matter of twelve months showing the sold-off business was a big drag on the company’s earnings as it was losing $250 million/year.

He said he made the right call and the technology is now being sold through a joint venture between Alcatel-Lucent and the company into Korea where Nortel now is able to consolidate the UMTS revenue from this deal onto their P&L. He says it is a great agreement because he doesn’t have to spend on the R&D but sees 50% of the revenue.

He further discussed his company’s decision to work with Alvarion to sell this Israeli company’s products. He explained this move was not Nortel getting out of WiMAX but instead deciding to let a company which was an expert in WiMAX handle the development which subsequently lowers Nortel’s R&D costs.

I asked how Nortel expects to increase share when there is talk of financial problems in the company and most of the competitors too are looking to have a strong LTE strategy. I asked what the company will do differently to ensure they sell into this space successfully.

Lowe gave a good answer by saying, “What has served us so well so far is we were able to start early because we were able to stop spending on wideband CDMA and most of our competitors were bogged down with having to continue to invest pretty heavily in that technology. So we clearly have some kind of market advantage.” He further went to explain operators are happy with the company’s time to market and technology innovation. Continuing, he further explained Verizon gave very strong feedback on the trials the company is undertaking right now and T-Mobile publically selected Nortel for their LTE showcase. He also said KDDI selected his company to serve the LTE core of their network.

He did mention if the [LTE] technology gets delayed, it neutralizes these advantages but incumbency does provide some help [in operators like Verizon and others].

“So what I am looking at is this technology was supposed to roll out in 2012 but market competition from WiMAX pressured operators to accelerate LTE standardization and availability – you are going to see the first deployments of this in the fall of 2009 and commercial deployment with devices in 2010.” He said if this is the case, Nortel stands a better than fair chance of being selected as one of the vendors [selected by carriers].

He said he would be surprised if any operator selects a single vendor for their entire network as the technol
ogy is too new. He believes large operators will likely pick 2-3 vendors and he wants to be one of them.

He conceded he would like to be in a better financial situation and doesn’t want to have the [negative] press on Bloomberg and the Wall Street Journal as this just distracts the operators. He went on to say Nortel needs to enhance its position by potentially divesting itself of businesses like MEN. He also needs to partner selectively so they can leverage their R&D to deliver more product faster than the competition.

He says on his own he may struggle to compete with Ericsson on R&D but with partners like Hitachi and others, he believes he levels the playing field.

He further elaborated on his company’s selectivity by saying he is focusing on tier one early adopters.

On competition from Asia, Lowe explained equipment providers such as Huaweii and ZTE used to lag in technology and quality but recently have narrowed the gap. This means Nortel needs to continue delivering value by providing innovation and being competitive while still delivering on margin commitment to the shareholders.

He did mention he is “playing on their turf,” referring to 65% of his R&D efforts which are in China and India. He says, “The inherent R&D advantage the Asian competitors have is being diminished by his move into their market while their costs go up as they move into my market.” He said.

He concluded by saying, “We in no way diminish the challenges that the company faces. We are facing them head on and I can’t control what people say, I can only do what I say I am going to do and use those proof points to refute the naysayers.”

I think the interview is self-explanatory and I feel more than comfortable with the answers Lowe gave to my questions. In response to the most common question I get about my feelings about Nortel’s future, I have to say I feel better after this interview than I did before.

Still I can’t guarantee this company will stay in one piece but I can tell you that if it doesn’t, it probably won’t matter as another company will buy whatever divisions make sense and likely provide a great level of service. So this wouldn’t be a major concern of mine if I were a customer.

In addition, we know that LTE and 4G are the future and these should be immensely profitable businesses. Remember my tongue-in-cheek comments about people giving up their houses before they give up their cell phones. In the next few years, kids will be posting live mobile video on their FaceBook pages and viewing the videos of their friends on social networks. In addition I expect mobile devices to be streaming multiple simultaneous video feeds as 4G networks are built-out. Someone needs to provide this bandwidth and someone needs to make the equipment which supports the bandwidth.

So the market spaces the company is in will thrive – especially if carriers get more visibility on consumer and enterprise spending. If Nortel is able to execute and customers do not defect – and these are big “ifs” they will likely be in fine shape if the economy stops deteriorating next year.

If the economy takes more than a year to turn around, many of Nortel’s competitors will have problems as well so one wonders if this excessive focus on the financials of one company makes sense. Sadly, these sorts up public discussions about a company’s sales tend to become self-fulfilling prophecies and I hope the market doesn’t act hastily in making purchasing decisions as a result of the recent negative news.

Expect me to keep a keen eye on the happenings at this company and others and to continue to report with your best interests at heart.

To learn more about the 4G space be sure to attend the 4G Wireless Evolution Conference this February in Miami and visit the 4GWE site on TMCnet. These products are a result of a partnership between TMC and CrossFire Media – consisting of the ex-Pulvermedia team of Carl Ford, Scott Karman and others.

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