June 11, 2008 / 11:13 AM / 10 years ago

Nortel outlines push into fast-growth markets

OTTAWA (Reuters) - Nortel Networks Corp’s NT.TO NT.N product plans will help boost sales more than 20 percent in growth markets by 2011, North America’s biggest telecommunications equipment maker said on Wednesday, helping to trigger a nearly 14 percent jump in the beaten-down stock.

Nortel President and Chief Executive Officer (CEO) Mike Zafirovski speaks during a news conference in Mumbai August 13, 2007. REUTERS/Punit Paranjpe

Nortel, which also reconfirmed its 2008 outlook on Wednesday, said that in three years it expects 60 percent to 70 percent of its products and services will go to growth markets. Last year, that figure was 38 percent.

Growth markets are expanding by at least 3 percent a year, while mature markets represent smaller gains.

“This is where we’re placing our bets, this is where we’re focused,” chief strategy officer George Riedel told the company’s investor conference. “Yes, we have to execute, but this is where we’re going to grow.”

Nortel has made bets in seven key areas where it expects double-digit growth, Riedel said in an interview with Reuters.

Positive news from Nortel’s wireless unit also helped drive big gains in the poorly performing stock, down about 37 percent so far this year. Shares jumped nearly 14 percent to end at C$9.42 on the Toronto Stock Exchange and at $9.20 on New York.

“Given Nortel’s share price, if Nortel management was able to get up and not fall off the stage, the share price probably would have gone up,” said Duncan Stewart, president of Duncan Stewart Asset Management Inc., who attended the analyst event and has no position in the stock.

“They, in fact, exceeded that. They showed a coherent and reasonable plan, that while I think unlikely, is possible.”

Nortel said it won a deal to sell a new generation of switching equipment to U.S. carrier Verizon Communications Inc, but did not disclose the value of the sale.

The Toronto-based company also said it will focus its 4G development efforts on the long-term evolution (LTE) wireless standard, while “realigning” work on the rival WiMax standard under a new joint venture with Israel’s Alvarion Ltd ALVR.O.

There is increasing urgency for next-generation 4G wireless networks, where growing demand for mobile data is driven by such tools as smartphones and embedded laptops.

LTE is “the main game,” with big wireless carriers, said Riedel, adding that Verizon tests Nortel’s LTE gear this year.

The WiMax venture with Alvarion will save 12 to 15 months development time, said Riedel, adding that revenue is expected to begin in 2009.

But some analysts expressed concern that Nortel’s plan is overly ambitious because the company faces sharp declines in mature markets, where old technology is being replaced.

“We’ll need strong growth in the growth segments to offset the declines in CDMA and some of the other legacy businesses that we have,” said Chief Financial Officer Pavi Binning.

Nortel sees the telecom and information technology industries converging into a market worth more than $1 trillion.

The company wants to cut spending on a range of areas. It plans to reduce information technology costs by 10 percent in 2008 and finance expenses by 25 percent, for example.

Toronto-based Nortel repeated its 2008 forecast for revenue to grow at a low single-digit percentage rate from 2007. It also expects gross margin at about 43 percent of revenue and operating margin as a percentage of revenue to increase by about 300 basis points.

“Moving forward our objective is for gross margin to be at or above our target level of 43 percent,” Binning said. “When I look at the drivers of gross margin when I look at the mix, pricing erosion, productivity etc., my assessment is we’re looking in the 43 to 44 percent range.”

($1=$1.02 Canadian)

Reporting by Susan Taylor; editing by Frank McGurty

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