Nortel Buzzboard

I listened in on Nortel’s 2Q08 earnings call this morning, led by Nortel CEO Mike Zafirovski and CIO CFO Pavi Binning. You can access their presentations slides and hear a replay of the call here if you are interested.

Below are a few interesting points that I took from the call (not necessarily in order of the conversation on the call).

• Revenue for the quarter was at $2.6 billion, up 2% year-over-year. For 1H08, Nortel’s revenue is now up 7% YoY.
• Mike Z and Pavi Binning highlighted several times the continued progress with gross margins and operating margins. In the press release, Mike Z highlights: “We delivered gross margin of 43.1%, the seventh consecutive quarter of year-over-year improvement, and management operating margin of 4.3%, the eighth consecutive quarter of year-over-year improvement.”
• The presentation highlighted gross margin improvements in Carrier Networks, Enterprise Solutions, and Global Services.
• The presentation highlighted “significant improvements in G&A,” driven by cost reductions in IT and finance.
• Mike Z said that in the second half of 2008, Nortel would be increasing and refocusing sales resources to focus on the growth segments of 40gig and unified communications
• Mike Z said that: We have invested heavily in Enterprise and MEN, and we are starting to see the trajectory to growth in those areas.
• A quick mention of an org change was mentioned, as Samih Elhage was announced as the new leader of the Carrier VoIP and Applications business.
• Carrier Networks: quarterly revenue was down 2% YoY. CDMA revenue down 10%, with GSM/UMTS revenue up 11% YoY. The decrease in CDMA revenues, along with comments during the presentation of a slowdown in U.S. carrier spending were discussed during the call. One analyst asked about Nortel’s CDMA market share, to which Mike Z responded: “…certainly over the last couple of years we have gained [CDMA] market share and we don’t expect to lose that going forward.”
• Enterprise Solutions: revenues were up 3% YoY. Gross margins increased while management operating margins decreased, reflecting increased marketing and R&D spending in the area. An analyst point out that the enterprise businesses still didn’t have a positive margin, and asked Mike Z how confident he was in this changing in 2H08. Mike Z commented that gross margin in the enterprise business had improved nicely in the quarter, and that Nortel expects enterprise to have a positive OM in the 2nd half.
• Metro Ethernet: Revenues were up 4% YoY, with gross margins flat and management operating margin up. Several times during the presentation, Mike Z highlighted the growing momentum for Nortel’s 40gig solution. Nortel now has twenty 40gig wins, plus five tier one trials. Mike highlighted that at the last update (the analyst day event) that number was at 14 wins.
• Global Services: Revenues were up 9%, with higher gross margins and management operating margins. A quick calculation shows that Global Services accounted for just over 20% of Nortel’s total revenues in 2Q08.

• Mike and Pavi also maintained overall guidance for the full year of 2008.
• Mike Z: The Microsoft relationship has been a tremendous benefit to us….opening doors.
• Analyst question: Does Nortel have the right strategy for growth in 2009? Mike Z: We are looking at ~65% of revenues coming from growth markets. We are looking forward to demonstrating the foundation to drive the business in 2009. Headwinds in CDMA will put more of a sense of urgency in driving those changes.

After listening to the call, it seems clear to me that the second half of 2008 is going to be about executing on the growth businesses that Nortel has been putting in place over these last two years. The numbers show that there is definitely more customer momentum in those businesses where we have some differentiation and technology leadership - the next step is turning that into 2H08 results.