At least one analyst has been forecasting a sharp decline in the optical market for 2009 as the economy continues its unpredictable gyrations. But the slowdown appears to be hitting telecom equipment makers sooner rather than later. Ciena Corp.(CIEN), for example, recently warned of lower earnings for its fiscal third quarter of 2008, sending rivals’ stocks – and its own – into a tailspin. The second quarter of 2008 was one of the roughest yet for Alcatel-Lucent(ALU) since the much-maligned merger. The whopper, though, hit on Sept. 17, when Nortel Networks Corp.(NT) said it’s ready to cash in its profitable, well-respected Metro Ethernet Networks (MEN) unit, comprised of optical and Ethernet gear. That would leave its carrier and enterprise groups, which include Nortel’s 4G – or Long-Term Evolution (LTE) – solutions.
Yes, Nortel is wrestling with the same problems as the rest of the telecom equipment industry: Carrier sales are tepid and sales cycles are prolonged. Exchange rates no longer are favorable toward North American currencies. However, Nortel owns the No. 3 optical spot, behind Alcatel-Lucent and China-based Huawei, so the Canadian manufacturer’s revelation that it intends to offload MEN perplexes industry experts, leaving them unsure that any outsider really knows what’s happening inside the company.
“This is a surprising choice of units to divest,” said Thomas Straub, a nearly 20-year veteran of the telecom sector who now brokers relationships between network service providers and suppliers such as Nortel. Carriers are indeed spending less, he said, but MEN still makes money. Meanwhile, Nortel’s 4G work won’t bring in sales for, potentially, years.
“I suspect that Nortel will not look at a fire sale for this unit, but must think they can bring in substantial dollars – cash preferred – for the MEN business,” Straub added. “I just worry that they may be trading off a short-term balance sheet issue against a key long-term strategic issue.”
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