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Our Journey to Transform Nortel
Location: Ottawa, Canada
Over the past year, some of the “non-technical” comments from many of you have been focused on what you consider to be the lack of visibility for Nortel in the public arena from a marketing and advertising perspective. My intent was to post a blog today about our new advertising campaign, but given the elephant that’s in the room – re: the visibility we actually did receive this week around our Q4/2007 financial results – I thought I’d offer some thoughts and perspectives and defer the advertising entry ‘til next week.
It’s pretty clear from the comments that many of you are very passionate about the business and about Nortel, and that’s a good thing. For those of you, however, who are forming opinions about the company based solely on the stock price or the headlines – which were brutal, as headlines tend to be when restructuring is part of the news – I’d encourage you to take the time to dig a little deeper. I think you’ll find some good data and some strong proof points that might make you feel more positive about our progress.
I’m not going to reiterate the results here, but would encourage you to take some time to listen to the call that Mike Z and CFO Pavi Binning held with the investment community on Wednesday. It will give you some insights into the company and why I remain optimistic about our future. A playback is available here.
In particular, I would draw your attention to Chart 12 in the slide package that was used during the call, which in a nutshell captures the past two years of our transformation journey and what lies ahead (and we are certainly not naïve to the challenges). (The rest of the deck provides the details and proofpoints.) Essentially, two years ago, we were losing share in most segments; we had an uncompetitive operational and cost structure; and we had operating margin losses for four out of the five prior years. That’s when we launched a major, multi-year transformational plan to recreate Nortel into what Mike Z describes as “a high-performance company that is consistently profitable and is known for its technology innovation, outstanding quality and operational excellence.”
Two years later, we recognize there is still much to do, but progress we have indeed made. We’ve rebuilt market momentum and have restored customer confidence (a number of charts in that same deck will show you a list of major and significant customer wins); we are on a better earnings trajectory than any of our peers; we have significantly improved our operational and cost structure (6th consecutive quarter of gross margin improvement and our operating margin for the quarter was the highest it’s been in 12 quarters); we’ve grown faster than the market in many segments; we’ve rebuilt the company’s leadership (have a look here – world-class leaders with proven track records); and employee satisfaction is up.
Every major function in the company is going through a transformation of some sort and each can tell an encouraging story of progress. On the R&D front alone, we’ve accelerated the shift of R&D dollars toward new and emerging markets and technologies and are close to operating at our target R&D distribution of 20-60-20 (20% of the R&D budget directed at emerging technologies; 60% at core/sustaining; and 20% at legacy); our advanced technology research labs are continuing to pioneer breakthroughs; we’ve increased the reuse of technology across the company (build once – use many); we’ve improved our plan of record predictability; we’ve put new recognition programs in place for the R&D community; we’ve established a portfolio management board that ensures there is process, rigor and discipline in the management of our overall portfolio and future investments; we’ve increased the hiring of new grads into the company; etc. etc.
Every function in Nortel, I would argue, is in a stronger position than it was two years ago. We ARE making progress.
The one point from our announcement that might be worth highlighting in order to clarify some confusion around the loss we reported is related to the deferred tax asset write-down that Nortel took. Without the tax write-down Nortel actually had net income of $154 million. I’m not a tax expert, so in order to explain it I thought I’d copy here the explanation that Peter Look, our VP of Tax, shared with employees in response to a number of questions that came in on our employee blog:
“What are the Canadian deferred tax assets? In Canada, Nortel has about $1 billion of unused R&D tax credits, $1 billion of tax losses from previous years and about $0.5 billion of future tax deductions not claimed on any tax returns yet. We “wrote-down” a portion of them in Q4.
Could we have avoided a write down? No, we’re required every quarter under accounting rules to look at how much we can reasonably expect to use and over what timeframe we think we can use them. A lot of factors come into play in making that judgment. Please note that this is just “accounting” and that the tax benefits are still available for us to use as future conditions warrant.
Why now? There were a convergence of events in Q4 that interacted negatively with each other. Among them were 1) a 3.5% tax rate cut enacted in Canada in late-December which stretched the time horizon to use the R&D credits and 2) a continued strong Canadian dollar versus the US dollar (about .85 in beginning of year versus close to par at end of year) that devalued the stream of future Canadian taxable income (expected to create the tax to be sheltered by the assets), because our Canadian business unit earns a bunch of its income in US dollars.”
Bottom line: We’re on a journey to transform this company to once again be the great company that it was, and we’re making progress. I came to Nortel about 1.5 years ago to be part of what I continue to believe will be a tremendous transformation story. And, I’m as committed now as I was then to helping drive that transformation.
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March 1st, 2008 at 12:59 am from John Roese’s Blog » Blog Archive » Our Journey to Transform Nortel « Custom Search on Telecoms