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      • « Nortel’s Star: PR | Main | Some Good News for Nortel »

      Stewart on NT

      By Mark Evans | August 9, 2008

      Duncan Stewart, one of Canada’s most knowledgeable tech analysts, offers up his thoughts on Nortel’s recent financial results in his weekly column in the Financial Post.

      His advice: focus on Nortel’s CDMA sales, SG&A costs and free cash flow as much as revenue and profits.

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      Topics: Financials |

      Viewing 21 Comments

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        Funny, I bring up the NT ticker yet again and click on the 10 year range:

        http://finance.google.com/finance?q=nt&hl=en

        Hm. NT stock flatlined after the 2000 spike. Underneath the ticker are listed "Related Companies". Each one experienced the same spike, yet they've all recovered to some extent, compared to NT. Whats their excuse?
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        My local phone company filed long ago:

        "Like a number of telecom companies that went through the high-tech meltdown in early 2000, Waynesboro, Va.-based Ntelos was wounded but did not die. After an aggressive expansion into the wireless business in the late 1990s, the debt-laden telecom took Chapter 11 bankruptcy in March 2003 and emerged six months later as a private company.

        The new shareholders are the former bondholders. "As part of the restructuring agreement, they are equity holders of Ntelos," said Mike Minnis, director of public relations. "When we filed for bankruptcy, we had $900 million in debt, but when we emerged, it was down to $300 million."

        And, guess what, many of the Playas are still in charge here.
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        After all this hubris about Mr. Stewart's column, I had to read it. (Mr. Broadbandbill, I think you misread his column, but you definitely show class in the apology below). I agree with Mr. Stewart. Now, let's get to the bottom of this - Nortel will go bankrupt and it is likely going to be sooner than most people at Nortel think. Their current debt position is greater than their cash, they have no room to manoeuver, their debt carrying costs have significantly increased, and their legacy CDMA business is falling off a cliff and they absolutely have anything close to replace it. Shame on the leadership at Nortel ! Mike Z. and his cronies came to Canada either thinking the situation was not as bad as they thought (nice due diligence) or they underestimated the people running the place and perhaps felt they could fix the problem with a few tweaks around cost and process management. There is absolutely no strategy at the top of the house and they don't have the guts to do whatever most people think they should do - shrink the business significantly by selling off large chunks of their legacy business and re-invest the proceeds in future growth businesses. Only problem is - I don't think they have a clue on where to place their bets. This of course is a highly risky strategy but right now, Nortel will die a slow death (maybe not so slow???) and by putting a knife to the business, the patient might survive - albeit a smaller one, but far more profitable than the current business model will drive. This is a very sad situation and unfortunately, no matter which way the mgmt goes, Canada will lose another tech heavyweight (ok, maybe lightweight) and the jobs that go with it!
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        So sad - you are right when you state that Nortel's Long Term Debt is currently greater than their Cash on hand. However, shouldn't we also look at their debt repayment schedule before making predictions that "Nortel will go bankrupt and it is likely going to be sooner than most people at Nortel think."

        From their last annual report, the debt repayment schedule looks like:

        2009 - $26 Million
        2010 - $26 Million
        2011 - $1,027 Million
        2012 - $604 Million
        Thereafter - $2,109 Million

        We see that between now and the end of 2012 the total debt payable is $1,683 Million against a current cash balance of a little over $3,000 Million.

        Given these facts, what's your call? When do you expect Nortel to declare Bankruptcy?
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        I heard from a very gentlemanly Duncan Stewart noting that he is indeed bearish on both NT and CDMA, (even challenging Richard Lowe during Analyst Day on their stated 4% CDMA sales decline) so I take this opportunity to publicly apologize to Duncan for my earlier comments (see below). For info, I have already done so in private. In any event, it looks as if I was the one being anal. Not the first time, won’t be the last…--bb
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        Hmmm.... Time to leave the boat ? Will management let the business go down, or will they sell some parts to generate cash ? But which part can they sell ? Who's interested ? I believe NT wants to become a "solution" provider... but what's that worth ? what does it mean ?... Is their 100gig solution their next main focus ? What about metro ethernet... Let's just hope their recent increased PR will get them some new customers...
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        Its an agonizingly slow and painful death indeed.
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        Commentor,

        The only true Nortel Die-hards are their talented and dedicated engineers fortunate enough not have their jobs shipped to ‘lower-cost geographies’ (an Orwellian phrase, if there ever was one). And they are just as disgusted with their leadership as the rest of us are. So much promise, so much potential but so little understanding of core issues equals slow agonizing death, the worst kind.
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        bb I concur with you as you know something about G Orwell as I do
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        where are all the Nortel Die-hards? Zero comments from them on this blog since the results? More importantly, John Roese disapeared and his blog is slowing down in the most critical of times, what a great leadership quality this CTO is showing.

        I hope the silence is a sign of agreement that this leadership is got to go inorder for Nortel to have any hope of life.
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        Anon, you are correct, no one is going to buy LTE from Nortel unless they already buy an existing wireless product from Nortel. This means the customer must be buying CDMA, since Nortel exited UMTS and no one is going from GSM to LTE directly. That narrows the LTE market for Nortel down to their existing CDMA share (25% for Nortel) of a small CDMA technology share (20% of total wireless market). This means Nortel's MAXIMUM market share of LTE is (20%x25%) 5%! So they are DEAD before they start in that business.
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        Let’s think strategically here, not tactically; the latter is how Nortel found itself in its current mess of no growth markets either product-wise or customer-wise.

        They will back to tactically if they already aren't. Nortel's stock price has always been a relatively good leading predictor of economic slowdowns and busts. I've always felt this was due to exposure they have of customers buying legacy products rather than anything new. This time is no different. While there are more next gen solutions around, I think even Qualcomm gets most of their revenue from legacy CDMA products so a slowdown there would still be a good predictor of a massive slowdown in North America. Canada too had its highest job loss in 17 YEARS in July. This is now spreading into Europe and Asia and once the Olympics are over the air will fully be let out of China. The slowdown in Canada and Europe has already hit the loonie and Euro hard the last week.
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        As CDMA goes so goes Nortel. The lack of vision and leadership of the Wireless business unit is now coming home to roost. Margins eroded faster in CDMA than they should have because they effectively outsourced the 1xEV-DO product to Airvana - What were they thinking, that Airvana would not want to make a profit? WiMax was a flameout for Nortel when they could have been a supplier to Sprint except for stunningly poor execution by the business team and and lack of courage from the R&D leadership to push back on stupidity. And now they have a Hail Mary pass called LTE. When, in the late '90s, Nortel decided to go all out for UMTS they decided to 'de-emphasize' their GSM efforts and thus the support to those customers. UMTS was the evolution of GSM. With increasingly dissatisfied GSM customers in North America (contrary to all the noise, NA was the profit region for NT's GSM business), Ericsson and others seized the opportunity. The likelihood of success for their UMTS product dwindled and was eventually sold off to ALU. Well, LTE is the 'evolution' of UMTS ... so what is the likelihood of Nortel selling LTE without an UMTS customer base? Not so much, I would guess. This is what happens when your leadership team's greatest contribution to the success of the business was being in the room at the time.
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        Simple math sure trumps complex math. Translated into simple language the numbers add up to "forward-looking strategic paradigms of synergies to be leveraged. Metrically."
        Or, if you prefer "the market was bullish, turned bearish, and now you're brokish".
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        Folks,

        Let’s think strategically here, not tactically; the latter is how Nortel found itself in its current mess of no growth markets either product-wise or customer-wise. We are talking about CDMA, as in yesterday’s technology (see my post below); let’s not give Mr. Stewart or the ‘still-living-in-the-past’ managers at Nortel any ideas. Even QUALCOMM is getting off its CDMA gravy train…

        bb
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        Stewart takes a temporary slowdown in spending by Sprint and turns it into a continuous 10% CDMA decrease and somehow thinks that CDMA spending will go down 10% until it's zero. It's a one to two quarter Sprint problem. They will ramp their spending...they have to if they want to survive. Stewart is a legend in his own mind! I've had the misfortune of talking to him and hearing about his vast history and experience in covering NT. Nice earing!
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        Stewart takes a temporary slowdown in spending by Sprint and turns it into a continuous 10% CDMA decrease and somehow thinks that CDMA spending will go down 10% until it's zero. It's a one to two quarter Sprint problem. They will ramp their spending...they have to if they want to survive. Stewart is a legend in his own mind! I've had the misfortune of talking to him and hearing about his vast history and experience in covering NT. Nice earing!
        =========
        re
        Duncan is one of the best _proven right_ analysts we have ever had.
        But lets do the math
        $500 mill one quarter lower orders is not related to Sprint only.
        Nortel sells around 10% to its biggest customer Verizon.
        10% of the quarter revenue is around $250 mill
        plus another big customer, lets say Sprint $150 mil, plus another $100 mill is now around $500 mill loss in orders for Q2 2008
        Here you go, simple math.
        Q3 is expected the same isn't not? /lower orders/
        and what about Q4? ....what about next year? Are you sure Nortel promised growing orders in 2009? haha, I did not see a promise.
        Or
        How can you expect growth with declining orders? That is the main question.
        How Mike can show growth with declining orders?
        I say 2008 growth is a blatant lie and every one with brain knows it.
        Q2 CC transcript
        Paul Silverstein - Credit Suisse
        Thank Mike, Pavi, I was hoping for a little bit more insight on the development of the book to bill, is that all related to wireless to Verizon's plan? Were there other aspects, other pieces of business and the weakness?
        Mike Zafirovsk
        Very good question. We try to be as transparent both in the press release and in the comments given today. In short the answer is yes. The book to bill on non-carrier was [one out]. And we know and – the short answer is yes and I think based on the [reward] documents and activities over the last number of months and weeks, but yes.
        Paul Silverstein - Credit Suisse
        Yes.
        ===========
        book to bill?
        It is around 0.82 now! /Is it not? I know it is./

        The book-to-bill ratio is the ratio of orders taken (booked) to products shipped and bills sent (billed). The ratio measures whether the company has more orders than it can deliver (>1), equal amounts (=1), or less (<1). This ratio is of significant interest to investors/ traders in the high-technology sector.
        So in conclusion
        Orders are declining with the speed of 25% !
        or $500 mill a quarter!
        ==============
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        He clearly states the problems Nortel has in generating cash versus its debt levels and even mentions the credit crisis. He details a lot of the problems but then somehow concludes that Nortel isn't in as rough a shape as the Motley Fool score indicates. Duncan Stewart doesn't realize the company internally is in crisis-mode (again) and that the score is reflective of this.
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        Check out who is the top percentage now of the Nyquist mid/small cap index..

        http://www.nyquistcapital.com/2008/06/05/nyquis...

        Index Additions

        Everyone make a mental note- Nortel is no longer a big-cap stock. The steady erosion (destruction?) of value has made Nortel a mid-cap stock with a market cap of only $4B, making it eligible for inclusion in the Nyquist Index. A year prior Nortel’s market cap was $13B. Nortel becomes the largest component of the Nyquist Index with a 10.5% share.
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        Ayh Mark,

        I am really disappointed with you. Perhaps your intro should read: “Duncan Stewart is one of Canada’s top tech Anal-ist, since his advice stinks, as in really, really STINKS!!! Let me explain:

        Someone needs to tell Mr. Stewart that CDMA is really an acronym for Carrier’s Dying Mobile Architecture (read: No growth!). He also mentions Sprint in his column – “Nortel has done very well selling CDMA gear, especially in North America and especially to Sprint.”

        Speaking of ‘secrets’, the only thing Mr. Stewart had to do was to read the story on Sprint in http://www.unstrung.com/document.asp?doc_id=160988, which, in part states: “Sprint continued to bleed customers in the third quarter, with 776,000 of its high-value monthly subscribers dropping its wireless services.” In other words, Sprint is in deep anal-ist creation.

        Eyh Duncan, you need to come to SoCal and soak up some the benefits down here so you can start thinking more clearly. And you need to go through that telecom industry sparring debate with yours truly called “20/20 Telecom Camp”; I assure you it is guaranteed to improve your vision.

        ayh,

        bb
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        Its time Nortel used some of their 3 billion is cash to do a share buyback.since the stock has pulled back so much. If they believe in themselves they should do something to prove it. It seems these days that the management doesn't t really care about anyone but themselves. They make fat salaries while the investors suffer and nothing ever changes. Investor day ? How can you have an investor day and totally miss Q2 ???



        Regards,

        Concerned Nortel investor
       
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