Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: Nortel planning sale of two units
Prev. Ed.: February 25, 2009; FLASH UPDATE: Nortel to cut 3,200 more jobs
*Note: Though dated March 12, 2009, share price is as of January 13, 2009.
Flash Update
On March 11, 2009, media reports said that Nortel Networks Corp. is in the talks to sell its two main business units to competitors. The reports said the company is in talks to sell its core wireless-equipment business and a separate unit that builds telecom systems for offices with interested parties. The company filed for bankruptcy protection from creditors in January.
A more expanded account of analyst opinions will follow in the next update of NT.
Portfolio Manager Executive Summary [NOTE: This section has NOT been updated.]
Nortel Networks Corporation (NT or the Company) provides communications equipment, software, and services to telecommunications service providers, governments, enterprises, and cable service providers worldwide through its divisions – Carrier Networks (CN), Metro Ethernet Networks (MEN), Enterprise Solutions (ES), and Global Services (GS). Nortel's technologies are designed to increase efficiency, speed and performance by simplifying networks. Nortel does business in more than 150 countries around the world.
Key factors for determining an investment strategy for NT are as follows:
· A major portion of NT’s growth comes from the Carrier Networks division as it is impacted by the UMTS Radio asset divestiture, partially offset by growth in CDMA and VoIP.
· The Company remains strong in Optical, VoIP, Enterprise, and Services.
· Nortel has strategic alliances with Microsoft Corporation; Dell, Inc.; and IBM, as well as joint-venture with LG Electronics, Inc. and collaboration with IPC Systems, Inc.
5.3% of the firms in the Digest group are positive, 42.1% are neutral, while 52.6% are negative on the stock. Target prices range from the lowest of $0.00 to the highest of $5.00, with the average being $1.32. The expected return over the current share price is 388.9%. Most of the firms valued the stock on P/E multiples, DCF analysis, or multiples of revenue.
Bulls (Buy or equivalent ratings) – 1 firm or 5.3% – Target price provided by the firm is $5.00. The firm is positive on NT, considering its attractive valuation, continued revenue growth, relative stability in several key end market, new restructuring program, and margin improvements. The firm believes Nortel's improved financial profile is becoming more visible and further progress will be made in all categories during 2008. Nortel has formed a strategic alliance with Microsoft involving joint product development and go-to-market efforts for business communications products. This alliance differentiates Nortel from other IP Telephony vendors, and demonstrates a renewed commitment to the Enterprise space.
Cautious (Neutral or equivalent ratings) – 8 firms or 42.1% – Target prices range from $0.40 to $4.00. These firms are positive on the stock but have some concerns that put them on the sidelines for now. Their main concern is deterioration in the macroeconomic conditions that could lower carrier's capital expenditure, affecting NT's revenue growth and margins. NT’s margins and growth will be further pressured by the pricing pressure in the industry. The firms believe NT will be a long-term winner in processing systems and the products industry, but in the near term, it will continue to face problems. Hence, they advise investors to remain at the sidelines for the time being.
Bears (Negative or equivalent ratings) – 10 firms or 52.6% – Target prices range from $0.00 to $1.47. These firms are negative on the stock based on the challenges related to North American CDMA spending. The firms believe NT is in a weak relative position considering its market share and weak balance sheet. No near-term relief in the form of substantial revenue growth from new fourth-generation wireless technologies is expected. In the absence of new revenue growth, the firms believe Nortel will face the dilemma of either cutting research and development or delivering lower earnings, causing investors to doubt the Company’s strategy. Further, the firm thinks that low growth, high competitive pressure, and an absence of new technology drivers will be the norm for much of the telecom industry for the next two to three years with the exception of the rebounding optical segment.
General Long-Term Outlook on NT: Brokerage firms expect that worsening economic conditions, together with extreme volatility in the financial, foreign exchange and credit markets will impact the industry, Nortel and its customers. However, the firms also believe that Nortel is a recognized leader in delivering communications capabilities that make the promise of Business Made Simple a reality for the customers. NT’s next generation technologies, for both service provider and enterprise networks, support multimedia and business critical applications. Nortel’s technologies are designed to help eliminate barriers to efficiency, speed and performance by simplifying networks and connecting people to the information as and when needed. The firms expect total revenue to decrease at a 3-year (2007-2010) CAGR of 5.1% and net income to decrease at a 3-year CAGR of 49.0%. The average long-term EPS growth rate is expected to be 2.0%. Finally, they believe NT’s strong operating structure provides it an edge in winning deals, both from new and existing customers.
January 2, 2009
Recent Events [NOTE: This section has been UPDATED.]
On February 25, 2009, Nortel Networks announced that it plans to slash an additional 3,200 jobs worldwide over the coming months, as it restructures under bankruptcy-court protection. The lay offs are in addition to 1,800 job cuts that the company announced in 2008. Nortel said it will not pay severance charges to affected employees.
On February 4, 2009, Nortel Networks announced that it has suspended the sale of its Metro Ethernet Networks (MEN) unit as it begins a restructuring of its business. The Company had recently filed for Chapter 11 bankruptcy protection.
On January 14, 2009, Nortel Networks announced that it is filing for bankruptcy protection in the U.S., Canada and Europe. The Company said it would seek Chapter 11 bankruptcy proceedings in the U.S. Nortel, which had reported a $3.4 billion loss in 3Q08, has registered a sharp decline in its sales in recent months, especially in North America. Nortel was due to make a payment of $107 million January 15, 2009.
On November 10, 2008, NT announced its 3Q08 financial results. Revenue in 3Q08 was down 14.0% y/y to $2.32 billion. NT reported a net loss of $3.41 billion or ($6.85) per share on a GAAP basis; on a non-GAAP basis, the Company reported a net loss of $150.0 million or ($0.30) per share.
Overview [NOTE: This section has NOT been updated.]
Headquartered in Brampton, Ontario, Canada, Nortel Networks Corporation (NT) is a recognized leader in delivering communications capabilities. Serving both service provider and enterprise customers, Nortel delivers innovative technology solutions encompassing end-to-end broadband, Voice over IP, multimedia services and applications, and wireless broadband solutions. Its business consists of the design, development, manufacture, assembly, marketing, sale, licensing, installation, servicing, and support of these solutions. Nortel conducts business in more than 150 countries. Further information on the Company is available at its website: www.nortel.com.
Key investment considerations as identified by firms are as follows:
Key Positive Arguments / Key Negative ArgumentsFocused Investment: NT has taken the step of selling those businesses in which it lacks scale, such as UMTS radio assets, to Alcatel-Lucent. This will enable it focus on such areas as 4G wireless, Enterprise, and Metro Ethernet.
Large Installed Base: NT’s installed base of millions of circuits and lines with thousands of customers presents a huge opportunity for leveraging relationships and driving future project revenues.
Business Transformation: NT introduced a three-to-five year business transformation strategy to reduce expenses and grow revenue.
Enterprise Commitment: NT has formed a strategic alliance with Microsoft involving joint product development. This alliance differentiates NT from other IP technology vendors and demonstrates its renewed commitment to the enterprise space.
Growth Opportunities: NT’s focus on wireless infrastructure, VoIP, circuit-to-packet migration, packet switching, and metro optical should enable it to grow faster than the industry. / Competitive Threats: NT’s next generation product initiatives face some competitive threats especially from Asian vendors such as Huawei and ZTE.
Technology Adoption: The new products and technology adoption has significant risk factors. If the Company is unable to gain traction with its new products, the growth prospects of the Company will be challenged.
Consolidation of Service Providers: A number of carriers that NT has serviced over the past several years have consolidated. NT has notably kept itself away from the wave of vendor consolidation that occurred in response to this, which may hurt the Company’s competitive position going forward.
Others
· Failure to improve margins may continue to impede cash flow generation and debt reduction initiatives
· Lack of market opportunity for CDMA technology may significantly affect the future growth potential.
Note: NT’s fiscal year coincides with the calendar year.
November 14, 2008
Revenue [NOTE: This section has NOT been updated.]
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue ($ in million) / 3Q07A / 2Q08A / 3Q08A / 4Q08E / 2007A / 2008E / 2009E / 2010EZacks Consensus / $2,760.0 / $10,494.0 / $9,751.0
Digest High / $2,710.0 / $2,622.0 / $2,319.0 / $2,850.0 / $10,950.0 / $10,549.0 / $10,470.0 / $10,535.0
Digest Low / $2,705.0 / $2,620.0 / $2,319.0 / $2,624.0 / $10,945.0 / $10,323.0 / $8,506.0 / $8,515.5
Digest Average / $2,705.5 / $2,621.9 / $2,319.0 / $2,730.1↓ / $10,948.0 / $10,433.8↓ / $9,509.4↓ / $9,365.8↓
Y/Y Growth / -7.5% / 2.3% / -14.3% / -14.6% / -4.1% / -4.7% / -8.9% / -1.5%
Q/Q Growth / 5.6% / -4.9% / -11.6% / 17.7%
According to the Digest model, total revenue in 3Q08 was $2,319.0 million, down 14.3% y/y and 11.6% q/q. The quarter’s result was in line with the Street’s consensus of $2.31 billion. The y/y decline resulted from the challenging economic environment, competitive pressures, and reduced spending by key carrier customers.
From a geographic perspective, the decline in the total revenue was caused by the weakness in the U.S., Asia, Canada, and Europe and the Middle East, and Africa (EMEA), which was slightly offset by the better performance in the Caribbean and Latin American (CALA). Revenue from the U.S. was $945.0 million, down from $1,159.0 million in 3Q07 and $1,039.0 million in 2Q08. Revenue from CALA was $153.0 million, up from $140.0 million in 3Q07 but down from $165.0 million in 2Q08. EMEA contributed $576.0 million, down from $665.0 million in 3Q07 and from $634.0 million 2Q08. Asia contributed $505.0 million, down from $537.0 million in 3Q07 and $584.0 million in 2Q08. Revenue from Canada was $140.0 million versus $204.0 million in 3Q07 and $200.0 million in 2Q08.
Orders were $2,017.0 million versus $2,377.0 million in 3Q07 and $2,153.0 million in 2Q08. The y/y decrease in orders was due to the lower CDMA orders in North America and lower ES orders, partially offset by growth in GS and MEN. The book-to-bill ratio in 3Q08 was approximately 0.87x versus 0.80x in 2Q08. MEN’s book-to bill was a strong 1.08.
Provided below is a summary of segmental revenue as compiled by Zacks Research Digest:
Revenue ($ in million) / 3Q07A / 2Q08A / 3Q08A / 4Q08E / 2007A / 2008E / 2009E / 2010ECarrier Networks / $1,080.0 / $1,038.0 / $822.0 / $1,083.4↑ / $4,493.0 / $4,164.0↑ / $3,493.7↑ / $3,246.4↑
Metro Ethernet Networks / $360.0 / $378.0 / $317.0 / $375.3↓ / $1,525.0 / $1,394.7↓ / $1,379.2↓ / $1,497.8↓
Enterprise Solutions / $670.9 / $610.0 / $616.0 / $669.4↓ / $2,620.0 / $2,531.4↓ / $2,368.2↓ / $2,407.1↓
Global Services / $540.0 / $536.0 / $507.0 / $551.4↓ / $2,087.0 / $2,117.2↑ / $2,034.6↓ / $2,115.6↓
Other Sources / $53.7 / $60.0 / $57.0 / $57.7↓ / $223.0 / $230.7↓ / $223.4↓ / $220.0↓
Total Revenue / $2,705.5 / $2,621.9 / $2,319.0 / $2,730.1↓ / $10,948.0 / $10,433.8↓ / $9,509.4↓ / $9,365.8↓
The graphical representation of revenue segments as per Zacks Digest is given below:
Revenue Breakdown by Segment
NT’s reportable segments are Carrier Networks (CN), Metro Ethernet Networks (MEN), Enterprise Solutions (ES), and Global Services (GS). Further details are provided below:
Carrier Networks (CN) (35.4% of 3Q08 total revenue): Revenue from this segment in 3Q08 stood at $822.0 million, down 23.9% y/y and 20.8% sequentially. Compared to the year-ago quarter, CN revenue decreased across all businesses. Results were impacted by the reduced customer spending as a result of capital expenditure constraints, with most of the decrease occurring in North America. Compared to the previous quarter, CN revenue decreased across all businesses, including a 5.0% decline in CDMA. The CDMA decline was primarily due to the completion of contracts in the second quarter not repeated to the same extent in the third quarter.
Metro Ethernet Networks (MEN) (13.7% of 3Q08 total revenue): Metro Ethernet revenue in 3Q08 was $317.0 million, down 11.9% y/y and 16.1% q/q. The y/y decrease was primarily due to the reduced demand for legacy products and the recognition of previously deferred revenue in 3Q07 that was not repeated to the same extent in 3Q08, partially offset by growth in MSPP and long-haul DWM. Compared to 2Q08, MEN’s revenue decreased across all businesses primarily due to the completion of contracts in the second quarter that was not repeated to the same extent in the third quarter.