Mike Z.’s E-Mail to the Troops

By Mark Evans | Published: March 2, 2009

Here’s Mike Zafirovski’s e-mail to Nortel employees about the fourth-quarter and 2008 results:

Team Nortel: Our Q4 and full-year 2008 results were made public just moments ago. As we are now under creditor protection, we will not be holding a financial analyst call. However, it remains critical that you understand our results and what they mean.

There are three key points I’d like to highlight with regard to financials. Each come together to tell the story of our performance in 2008, particularly as we closed out a tough year. First – we took non-cash charges of $2.19 billion in the fourth quarter to reduce goodwill and deferred tax assets. Although neither of these impacts our financial fundamentals or our cash position, together they contributed to a net loss in the fourth quarter of $2.13 billion. It is not uncommon for these types of assets to be written down in an environment of declining industry profitability and company market valuations.

Let me explain briefly. For goodwill, if the company determines that the goodwill is impaired – meaning it’s not worth the value it’s carried at on the balance sheet – a write-down will be taken to reduce the carrying value of that goodwill. The other charge is against our Deferred Tax Asset. The asset is real and remains on the books as a “gross” amount. But with the uncertainty of when we will be able to use our tax loss carry forwards, the charge effectively “nets” down the asset to a zero value on our balance sheet. We can still use this asset to defer taxes on future earnings. We have prepared additional Deferred Tax Asset and Goodwill fact sheets to provide more information on these charges.

Second – our revenues are down. Approximately 15% over the fourth quarter of 2007. Though we expected this, it underlines how tough the market is, and how significant the curtailment of customer spend remains. This is not unlike other companies in the IT and telecom sectors. And third – despite the revenue drop, our determination on customers, costs and cash produced solid operating results. Our management operating margin (MOM) was actually above guidance, and both the 4th quarter and total year MOM were the highest since 2000! And we met our target for year-end cash balance of $2.4B, despite the strengthening U.S. dollar.

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Thanks for the efforts made by each of you to review spend – and curtail expenses while still focusing on the customer. The brightest light was how we served customers. Delivering the strong service they expect is critical to our ability to first stabilize and then rebuild our business. Key customer performance and quality metrics were at multi-year highs: Outage Recovery in less than 30 minutes improved 16 points over the year, reaching 71% in Q4. Response to Service Impacting cases within 48 hours improved 5 points in 2008 and doubled from 2006 levels.

Supply Chain Delivery Performance – shipment to published lead times – has improved steadily, showing an 8 point improvement over prior quarter 2007, and based on available information, are the highest in many years. These facts are further amplified in conversations with customers who are telling me that the performance and stability of our networks and performance of our people are at very high levels (many say the best in many, many years). It will be crucial for us to maintain these high service levels during our restructuring – they are key determinants of customer value and loyalty. Customers (and competitors alike) will be looking at us very closely, particularly after our January 14th filings for creditor protection.

We must not go backwards. And as I mentioned last week, these customer metrics are now imbedded in our Annual Incentive Plan (AIP). As you know, rewarding and retaining key employees is a necessary and important part of our restructuring plan. Last week we announced an AIP program with quarterly payouts to ensure that the majority of our people benefit from our progress. We also announced our intent to file a retention and incentive program for employees across the company who are in roles that we believe are especially critical to accomplishing a successful reorganization, who are in positions important in client relationship management, product development or who are in critical leadership roles required to stabilize the business. We did that in the U.S. on Friday and will this week in Canada, covering NA, CALA and AP. In EMEA, the UK Administrators are responsible for decisions on these programs.

The majority of participants selected for these programs are non-executives. For the selected executives, the payouts are contingent upon the achievement of important milestones. These programs are common practice and necessary for companies in similar circumstances. Still, they will receive much scrutiny internally and externally. I believe they are appropriate and will achieve the desired impact for the company. I am not included in these initial filings.

I’m also very pleased to announce that Pavi Binning has accepted additional responsibilities as Chief Restructuring Officer (CRO), while maintaining his current role as CFO. A CRO with deep knowledge of the business, a solid understanding of the restructuring process and credibility with our creditor groups is critical to developing and then executing on a plan. As you heard at our GIS last Wednesday, Pavi brings much depth of knowledge to the task at hand. As CRO, Pavi will work closely with me in developing and implementing our restructuring plan – coordinating and directing the various workstreams identified to drive its progress – and working to gain the support of the Canadian Monitor, U.S. trustee and UK Administrators, creditors and other stakeholders for that plan. I thank Pavi for agreeing to do this, and I look forward to his contributions and results in this role.

There is a significant amount of work ahead of us. Many doubt our ability to drive our company forward. And there is continued pressure in the market that can impact revenues. However, we remain focused on the task at hand. We will keep working to bring stability to our supplier and customer relationships, compete vigorously for new business, and make the appropriate investments to drive innovation and technology leadership in key areas. In parallel, we must, and will, keep reducing our cost base – aligning expenses with a smaller revenue profile. We’ll keep sharing news and updates with you as often as possible and do our best to answer your many questions as we continue to advance our work.

Thank you, once again, for everything you are doing. You are delivering when it matters most and that is making a real difference.

Mike

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  • Casual_Observer

    I'm speechless.

  • Casual_Observer

    Economy still shrinking..and its due to accelerate as new orders are shrinking even faster than inventories. The ISM report was just ugly. From Mike Shedlock below:

    Although inventories are rapidly shrinking, new orders are shrinking even faster. Note that customer inventories are still rising. Thus, further cutbacks in production are necessary and prices will remain under pressure.

    There are many other charts in the report. Please take a look.

    Mike “Mish” Shedlock
    http://globaleconomicanalysis.blogspot.com

  • angermanagement

    blah blah blah blah blah blah blah blah blah.

  • anotheropsguy1

    Although better than expected while we remain in chapter 11 the orders will simply not come.

    Let's just hope that the re-organisation has some substance unlike the majority of the changes so far.

  • horace_grimswold

    fear and greed

  • tookthemoneyandran

    Cripes, these guys still think they can “save” their way back to health. How's it worked so far?
    Remember customers…..Oh wait, that's right, much easier to get money from the company if you're one of the GE select, than to get it from customers. Anyone believe this amazing, world-class, hey, look -how-clever-we-are, operational excellence won't be used as a basis for handing more money to this bunch of asshats?

  • longgone

    Zschitt

  • stillatnortel

    Yeah, loved this one. Of course the majority are non executives….but the vast majority of executives are included in the program. And by far, the majority of the money would go to executives. This one was unbelievable, yet completely believable.

  • protosphere

    “it remains critical that you understand our results and what they mean. “
    (then why not clearly state tax credits are an asset against future earnings that are unlikely, for them to have folded to begin with)

    “Although neither of these impacts our financial fundamentals or our cash position, together they contributed to a net loss in the fourth quarter of $2.13 billion.”
    (Loss is not good news no matter how you cut it and a huge asset like this appearing on books they sought to clean was misleading to begin with. $2.13B writing down goodwill and removing tax credits doesn't impacts cash in Q4? Never mind Q4. what about the blatant cash reduction of a cool billion over the last year to bankrupt, more importantly after Q4 and bankruptcy. What about the “available” cash, no elaboration?

    “For goodwill, if the company determines that the goodwill is impaired – meaning it’s not worth the value it’s carried at on the balance sheet – a write-down will be taken to reduce the carrying value of that goodwill. “
    (no kidding Sherlock)

    “Deferred Tax Asset. We can still use this asset to defer taxes on future earnings.”
    ( haha… good one! nice try. When? do they expire? After chapter 7?)

    “our revenues are down, This is not unlike other companies in the IT and telecom sectors.”
    (C'mon… still trying to comparing Nortanic to other companies as they lost money for a decade to folding today. How many went bankrupt and what impact did the bankruptcy have to surely have made them “unlike other companies” today. Delisted)

    ____________________________________

    Lose more but what they did make had better margins for bonuses as they cut employees and their severances /creditors under protection… Will Q109 have even better margins against dramatically declining sales/revenues? Like, so what losing so much cash over the year to insinuate improvement with no mention of the trend since Q4.

    Why not talk about after bankruptcy trend while not taking questions from analysts today because bankrupt but doesn't stop the hype, or tanked shareholder at canceled AGM, or letting employees speak with media as they tell them to stand in line with unsecured creditors for severances…

    How can we doubt this any more than extreme reverse split drew institutions, $30/shr fraud settlement was fair to 8 cents today… single digit growth to loss midstream, 3 to 5 year plan to stall yet another let alone under bankruptcy, $20 buying opportunities to 8 cents, downplaying revisions that doubled or downplaying folding otr that they didn't know earlier, etc., …endless contradiction /no credibility…

    What do they know or say today, the tax asset is real? How could it be false? hahaha… sell it to some one else… how many more layoffs without severances coming as they wind down, when can we expect yet another earlier than expected surprise in the mad dog's rush within 90 days…

    Just as I expected, more happy talk in the throws of bankruptcy with an unprecedented no questions, like everyone is oblivious to history or believes their selective disclosures.

  • fatzoff

    As you all know we have hit the iceberg and we a quickly taking in water. Thank you crew for your best efforts and continue to work at bailing the water out. I have instructed Pavi to go to the kitchen and dump out all the cole slaw so has to use the big white buckets for additional bailing. I shall remain on deck and make sure all the “key” crew are ready to board a lifeboat that has been put aside for them. The waters are choppy and storms are forcasted. The SS CISCO and the SS JUNIPER, have declined all our repeated SOS and appear on the horizon ready to assist once I have issued the command to abandon ship. Thank you once again and I have appreciated all your efforts during this crucial time. Now I shall bid you all farewell and it will be every man for themselves going forward.

    Mike

  • Still_waiting

    For those of you whom wish to show your disapproval of KEIP for Nortel Execs.
    email : E-mail: DEB_Chambers_Judge_Kevin_Gross@deb.uscourts.gov
    Found in http://www.deb.uscourts.gov/ under Chambers then selecting on the Judge Kevin Gross. One Caveat is that there are chamber rules to follow.

  • Many

    Yep. Goodwill is impared alright

  • AZBY

    He has written a lot about incentives etc. He has mentioned that majority of folks who benefit from this are the non execs – but he has not mentioned the fact that this majority will get to share all of $3m while the small minority pack of execs will share $45m!

    So, the non-execs (numbering 1000-2000) will make about $1K-2K each and the execs (numbering less than 100) – well over $100K each!

  • AnotherSlave

    Everyone should let the monitors and creditors know what they think about this. I can't see rewarding anyone that got Nortel into this situation.

  • AnotherSlave

    Does anyone actually listen to this guy? I saw a recent video of him talking and all I could see what figiting and his eyes all over the place. If memory serves me right in the Army I was told not to believe someone with behavior like that.

    I guess I need a big drink of the kool aid tomorrow.

  • yes4aapl

    Lose more but what they did make had better margins for bonuses as they cut employees and their severances /creditors under protection…
    ==========
    re
    That's right Proto.
    Last 3 years Mike Z presented better margins, did he not?
    All of that just to misinform public about the business, the operations, profitability… all None GAAP measurements to fool investors and public! and all just to get fat bonuses!
    MooseBump and Wapuka explained that scam how using deferred revenues recognition improves those none GAAP numbers.
    No wonder Nortel shut up all the analysts this time!
    They made Mike Z look stupid so often!
    Margins improved and the business is belly up!

  • NortelTragedy

    No … I tune out to anything that comes out of his mouth these days. In fact, didn't realize how, well, unintelligible his messaging and points were until really listening to him.

    This point, in particular, is an laughable: “For the selected executives, the payouts are contingent upon the achievement of important milestones.”

    The “milestones” are either subjective, immeasurable or too easy, such as “cutting costs in North America”. Hhmmm, layoff 3,000 people and pay no severance, how hard can that be?

    Or objective: “… make Nortel a 'leaner' company.” Again, subjective, immeasurable and too easy, except for Mike Zudas and his cowardly “leaders”.

  • Nortel_Sucker

    This Pavi guy talks a good talk. That's all your going to get. Just like Obama.
    Don't trust any of these low life weasels.

  • Singapore1

    blah blah blah what a load of ****

  • Nortel_honey

    one word…wanker!

  • sca41335

    While I have read hundreds of excellent posts on this board, this one will somehow stick in my mind for a long time.. :)

  • Baudelaire

    The funny thing is that when the company decided to go Ch.11 it all started with some payment of about 100 MUSD which was not going to be done. Now the company decides to allocate half of that to a very restricted list of employees, and most likely those that won't be laid off. Although I can understant that there might be a rationale for not paying severances etc (not meaning I defend it but…) I think it would have been much more respectfull and encouraging for everybody to redistribute this money to all employees via a one time bonus or moderate salary increase ? At least this would have deserved more respect and ensured that even through tough times everybody is paid to do a job and does it whether they are going to stay or not.

    But I am only who I am and for sure I do not have the vision. Or my vision is unethical with respect to some ethics I do not understand.

  • NTdown

    Supply Chain Delivery Performance – shipment to published lead times – has improved steadily…blah blah blah…

    Oh my god, is there something wrong with my own eyes??!! In my region, CRD is always changing on the spreadsheet, and it just happened to meet FSD, work is well done ,and performance, sure, keep improving….

  • Baudelaire

    The funny thing is that when the company decided to go Ch.11 it all started with some payment of about 100 MUSD which was not going to be done. Now the company decides to allocate half of that to a very restricted list of employees, and most likely those that won't be laid off. Although I can understant that there might be a rationale for not paying severances etc (not meaning I defend it but…) I think it would have been much more respectfull and encouraging for everybody to redistribute this money to all employees via a one time bonus or moderate salary increase ? At least this would have deserved more respect and ensured that even through tough times everybody is paid to do a job and does it whether they are going to stay or not.

    But I am only who I am and for sure I do not have the vision. Or my vision is unethical with respect to some ethics I do not understand.

  • NTdown

    Supply Chain Delivery Performance – shipment to published lead times – has improved steadily…blah blah blah…

    Oh my god, is there something wrong with my own eyes??!! In my region, CRD is always changing on the spreadsheet, and it just happened to meet FSD, work is well done ,and performance, sure, keep improving….

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