At Nortel, Silence Isn't Golden

Investors crave more details of CEO Mike Zafirovski's turnaround plans. So far, they're not getting it

If there's one thing Nortel Networks (NT) CEO Mike Zafirovski knows how to do, it's push -- and push hard. While at General Electric (GE) in the 1990s, he fixed the company's European lighting business when few thought it possible. Later, at Motorola, he turned operating margins at Motorola's flagship cellular phone business from negative numbers to positive high single digits.

The high-energy exec even finished the grueling Ironman triathlon in the 9th spot among men over 40, returned home at 2:30 a.m., and reported to work at 8:30 a.m. the same day. "Mike Z [as he's known] came in high-profile -- the person that can finally turn it around," says Howard Sutton, president of Tera Capital Management, a Toronto investment firm that has long owned Nortel shares.

TURNAROUND IRONMAN?

  So when Nortel reported dour financial results for its delayed and much anticipated first-quarter earnings on June 6, Zafirovski didn't soft pedal the facts. The numbers were "disappointing," he said. Zafirovski had been hoping to report some growth. Instead, Nortel lost $167 million in the quarter ended Mar. 31, a wider loss than the $104 million loss during the first quarter a year earlier. Revenue slipped as well, from $2.39 billion to $2.38 billion.

The loss was deeper than Wall Street expected. And shares, which spiked when Zafirovski took over last year, sank nearly 3%, to $2.23, on June 6. Sutton, once excited over Nortel's prospects under Zafirovski, says the company is "more of a show-me story at this stage."

Sutton is not alone in losing faith. Many on Wall Street are wondering whether this respected Ironman is the turnaround leader people were hoping for. And if so, what does he have to do to put the company back on a growth path? Right now, Zafirovski is still concentrating on fixing a company that has been plagued with problems. It has had three earnings restatements in as many years, and its current losses included tens of millions of dollars in costs, in part from shareholder litigation. "We are driving hard to make some short-term improvements, while we're also trying to recreate a strong Nortel," Zafirovski told BusinessWeek.

GETTING WHIPPED.

  Zafirovski expects Nortel to produce high single-digit revenue growth for all of 2006 and announced in a conference call that second-quarter results will support that full-year forecast. Zafirovski says revenue will come from the sale of products to key wireless customers, and that the company has got good traction in Europe, Africa, the Caribbean, and Latin America across all its businesses. The strength didn't materialize in the first quarter because Nortel didn't recognize certain contracts. A backlog of business suggests "there is nice momentum in number of areas," he says.

Maybe. But for a generally straight-forward exec, Zafirovski has been vague on turnaround plans. In February, he said the company would exit unsuccessful businesses and concentrate on areas where the company can outstrip rivals, such as Internet Protocol TV, the technology that sends television signals over high-speed Internet connections (see BusinessWeek.com, 2/24/06, "Nortel's Long, Hard Slog".

But investors now are clamoring for more detail, and many observers have specific recommendations. Albert Lin, an analyst for American Technology Research, suggests Nortel consider exiting the wireless business altogether. Wireless is a hot growth industry and it makes up more than half of Nortel's revenue. But it's also fiercely competitive, and Nortel is frankly getting whipped by the likes of Nokia (NOK), Ericsson (ERICY), and others. "Most of Nortel's wireless sales have been for expansions of carrier's old technology as the industry grows," Lin says. "You get all these legacy sales, but that won't last."

BACK-BURNER GROWTH.

  Zafirovski is looking forward to the next generation of wireless technology and vows that Nortel will take better advantage of such areas as WiMax than it did the technology shifts in the past. "We believe there are good opportunities in next-generation mobility," he said in the interview. Still, that's a bet that might not pay off when competitors are arguably better positioned.

Nortel would be wise to expand its partnership with, say, LG Electronics into a full-blown wireless joint venture. LG is looking to expand beyond Asia, and Nortel has strong North American roots. Spinning out a wireless unit as a stand-alone would create more value for Nortel, Lin says.

Zafirovski also has placed an emphasis on providing services to carriers and enterprises. "In next-generation enterprise we have a customer base that is second to none," Zafirovski said. The trouble is, Nortel isn't alone. It runs up against everyone from Accenture (ACN) to rival telecom gear makers such as Lucent Technologies (LU,) and Motorola (MOT). And those companies, analysts say, have a broader portfolio to interest customers with complete solutions.

Many are eager for Nortel to sell off the businesses that show scant potential, and some would like to see Zafirovksi acquire companies that will jumpstart growth. "Absolutely, I want to see that," Sutton says. But following the advice of his old boss and mentor, Jack Welch, Zafirovksi has his eye on the short-term adjustments. He'll push for long-term growth -- but in due time.