A pair of wireless infrastructure vendors are set to face a tough 2009, as one company struggles to stay afloat and another changes strategy.
Nortel Networks Corp. has taken a number of hits this month since it reported a loss of $3.4 billion in the third quarter. Alcatel-Lucent said it will shift its strategy for 2009 and beyond as it comes off a third quarter that saw a net loss of $51 million.
ABI Research senior analyst Nadine Manjaro said the poor economic climate poses a significant threat to a number of companies. Manjaro said carriers are planning to cut back on spending and CDMA vendors could face a lean year because buildout for 3G networks is approaching maturity.
“Companies that are weak are definitely going to struggle,” Manjaro said. “This market will weed out some of the weaker players.”
Manjaro said carriers such as AT&T Mobility and Sprint-Nextel Corp. have already announced cuts.
“It would not be wise for the carriers to continue to spend like when times were great,” she said. “They have to cutback out of necessity.”
“Until LTE takes off, there will be a gap in the market,” she said.
Addition by retraction
Manjaro said companies that have clear strategies and execute this business plan can withstand the economic downturn. For example, L.M. Ericsson, which is the leader in market share globally, will benefit greatly from its emphasis on providing managed services as well as hardware.
“They’re not doing great business, but their share price is still around $8,” Manjaro said of Ericsson.
For others, 2009 will be an interesting year.
Nortel has seen its stock price steadily fall, dropping under 30-cents per share on the New York Stock Exchange. The NYSE has put the company on notice that it must increase it stock price to more than $1 per share in the next six months or the stock will be de-listed. The notice was sent out after the company posted 30 straight days were the stock traded below $1.
Moody’s Investors Service has also taken action against Nortel by downgrading its company ratings for probability for default, corporate family, senior unsecured and preferred share. The ratings change affects $4.5 billion of debt and preferred share instruments, according to Moody’s.
Moody’s said the action was prompted by published reports that Nortel has sought legal counsel regarding protection from its creditors in the event of a bankruptcy filing. Moody’s also said the company is unlikely to return positive free cash flow in the short term.
Manjaro said Nortel remains strong when it comes to the enterprise, but has suffered because the company attempted to win business from service providers. This has not taken off as the company has an unclear strategy and operators have changed choices in technology.
“That was an ominous situation, which the global recession has now made more serious,” Manjaro said.
Analysts have said that bankruptcy is a possibility for Nortel because it is burning through its cash. The company is expected to end the year with $2.4 billion of cash on hand. The company needs $1 billion to operate and could be down to $1.6 billion next year. The company also has a pension deficit that has been reported to be between $2.3 billion and $2.8 billion. The company has vowed to cut 2,500 jobs by the end of 2009 and is trying to sell its Metro Ethernet Networks business unit.
Change of course
Manjaro said a change in strategy by Alcatel-Lucent could pay off for the telecommunications equipment maker. The company announced earlier this month it would cut jobs, eliminate some contractors and invest in new technology such as Long Term Evolution and cut back in others, such as WiMAX. The company plans to combine its capabilities of the network environment with creative services of the Web.
Company officials said 1,000 management jobs would be eliminated as well as business with 5,000 contractors. Alcatel-Lucent CEO Ben Verwaayen said the company will invest in LTE because carriers worldwide are planning to use the technology for their 4G networks. The company will also continue to invest in W-CDMA and CDMA2000 1x EV-DO. Along with WiMAX, the company will also reduce spending on GSM and CDMA2000 1x.
Analysts said they were surprised Alcatel-Lucent would cut spending on WiMAX, which Sprint Nextel Corp. and its partner Clearwire Corp. plan to use for their next-generation network.
“I think that is a poor decision on their part,” Manjaro said. “They should capitalize on what they have done so far.”
Verwaayen said offering an open environment in regards to networks and the Web is vital to the company’s future. This will allow customers to use millions of Web sites from any device with the guarantee of security, quality, privacy and billing integrity.
The company will focus on three markets; enterprise, service providers and four areas of investment, which are IP, optical, mobile and fixed broadband and application enablement.
“We have a strategy here that gives us momentum in the market,” Verwaayen said. “We want to stimulate a sustainable business model for the industry that will fuel innovation and the capital investment required to expand the overall Web experience to more people and businesses.”
Profits by 2010
Company officials are projecting to break even in 2009 and then return to profitability in 2010. The company projects its new strategy will save $1 billion. Alcatel-Lucent is also planning to sell its share of Thales SA, a defense contractor. The sale could net the company as much as $2.1 billion.
Current Analysis analysts Peter Jarich and Ron Westfall have taken a neutral stance on the company’s new strategy. According to their report, the Alcatel-Lucent’s plan lacked any dramatic departure from previous efforts to reduce costs and streamline operations.
This “leaves Alcatel-Lucent vulnerable to rival assertions that the new plan is essentially more of the same,” according to the report.
