Nortel CEO Revamps Plans On Development Spending

Zafirovski boosts spending on some products, cancels or cuts back on others

Nortel Networks Corp. CEO Mike Zafirovski last week provided an update on his first six months at the company, saying that he plans to increase development spending on several technologies while dropping or scaling back nine product programs. Six product initiatives are being canceled, and three will be reduced in scope. Nortel identified only one of the six being eliminated: an edge router for service providers.

The cuts are part of a wider effort to chop Nortel's spending by $1.5 billion over the next three years in order to help stop an ongoing series of losses, Zafirovski said.

However, Zafirovski also said that he's setting up a unit focused on metropolitan-area networks and that he plans to devote additional funds to the development of WiMax products, as well as IP multimedia subsystems and video networking technology.

David Dooley, treasurer of the International Nortel Networks Users Association Inc. (INNUA) in Chicago, said Nortel hadn't given him details on the products being dropped. But, he added, Zafirovski's announcement isn't a big cause for concern.

"To the average user, none of the discontinuances will be major," Dooley said. "I can assure you that if they were major products people are clamoring for, [Nortel] wouldn't be discontinuing them."

Dooley, who is director of telecommunications and special projects for the Plano Independent School District in Texas, said he wants to hear more about the affected products and Nortel's overall direction when Zafirovski meets with INNUA members at the user group's annual conference in San Diego on June 11.

"In June, I want to hear a reaffirmation from him that the end users who have been longtime Nortel customers are important to Nortel," Dooley said. "And I fully expect he'll say that." The school district supports 51,000 students and 8,000 teachers with Nortel telecommunications equipment, using fiber-optic links between sites.

In general, "there is optimism in the Nortel customer base," said INNUA Executive Director Victor Bohnert. "Customers finally feel that Nortel is taking control of its sales channels and that [executives] are concerned about defending their market share."

But Jeff Kagan, an independent analyst in Atlanta, was more skeptical about Zafirov-ski's ability to turn around the Brampton, Ontario-based vendor. "What he says sounds good, but Nortel has announced things that sounded good in the past, and they are still digging out," Kagan said.

Nortel spent $73 million last year on development of the six product programs that are being canceled, according to Zafirovski. Spending on the three initiatives that are being scaled back totaled $80 million in 2005 -- an investment that will be reduced to about $40 million this year, he said.

On the other hand, the company plans to increase its spending on WiMax, multimedia subsystems and video networking by $100 million this year and another $67 million in 2007.

It isn't clear how the planned changes will affect Nortel's total research and development budget, which was nearly $1.9 billion last year. A company spokeswoman said that Zafirovski has yet to publicly disclose his overall R&D spending goal for 2006.

Zafirovski said he is focusing on product areas where Nortel can reach a 20% market share within three years.

Latest Developments at Nortel

Q1 revenue is expected to be flat with last year's level at best, but Nortel is forecasting high-single-digit revenue growth for all of 2006.
In Mike Zafirovski's first six months as CEO, he has replaced nine of the company's 18 top managers, with two positions now empty.
Nortel is in the early stages of an SAP ERP implementation that is designed to help eliminate by the end of next year financial weaknesses identified by regulators.


Copyright © 2006 IDG Communications, Inc.

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