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Dec. 29, 2008

A few companies are going through some very tough times right now, and some wireless industry analysts expect the situation to get worse before it gets better.

One such company is Nortel Networks. The beleaguered telecom equipment manufacturer reported a loss of $3.4 billion in the third quarter.

Another company facing tough times is Alcatel-Lucent. Although it isn't as badly hurt as Nortel, Alcatel said it will shift its strategy for the coming new year and beyond as it comes off a third quarter that saw a net loss of $51 million, substantially a lot less than Nortel's $3.4 billion loss.

ABI Research says the poor economic climate poses an important threat to a number of companies in the wireless segment. ABI says mobile carriers are planning to greatly reduce spending for 2009, and CDMA vendors could face a lean year because buildout for 3G networks is rapidly approaching maturity.

ABI Research says that wireless carriers such as AT&T Mobility and Sprint-Nextel have already announced important budget cuts.

“Companies that are weak are definitely going to struggle a lot. This market will weed out some of the weaker players,” ABI said.

“It would not be wise for wireless carriers to continue to spend like drunken sailors. They have to cutback out of necessity, not choice,” said an ABI analyst.

Wireless companies that have clear strategies and execute a good business plan can withstand the economic downturn to a certain degree. For example, L.M. Ericsson, which is the leader in market share globally, will benefit greatly from its emphasis on providing managed services as well as wireless hardware and carrier-grade equipment.

For others, 2009 will be an interesting year. Nortel has seen its stock price steadily fall, dropping under 30-cents per share on the New York Stock Exchange in the last week. The NYSE has put the company on notice that it must increase it stock price to more than $1 per share in the next six months or the stock will be de-listed. The notice was sent out after the company posted 30 straight days were the stock traded below $1.

Moody’s Investors Service has also taken action against Nortel by downgrading its company ratings for probability for default, corporate family, senior unsecured and preferred share. The ratings change affects $4.5 billion of debt and preferred share instruments, according to Moody’s.

Moody’s said the action was prompted by published reports that Nortel has sought legal counsel regarding protection from its creditors in the event of a bankruptcy filing. Moody’s also said the company is unlikely to return positive free cash flow in the short term.

Nortel remains strong when it comes to the enterprise, but has suffered because the company attempted to win business from service providers. This has not taken off as the company has an unclear strategy and operators have changed choices in technology.

Analysts have said that bankruptcy is a possibility for Nortel because it is burning through its cash. The company is expected to end the year with $2.4 billion of cash on hand. The company needs $1 billion to operate and could be down to $1.6 billion next year.

Nortel also has a pension deficit that has been reported to be between $2.3 billion and $2.8 billion. The company has vowed to cut 2,500 jobs by the end of 2009 and is trying to sell its Metro Ethernet Networks business unit.

There are some analysts that are now saying that it might be too little, too late to save Nortel.

However, a change in strategy by Alcatel-Lucent could pay off for the telecommunications equipment maker. Alcatel announced earlier on Dec. 5 it would cut jobs, eliminate some contractors and invest in new technology such as LTE (Long Term Evolution) and cut back in others, such as Wi-MAX.

Alcatel also plans to combine its capabilities of the network environment with creative services of the Internet.

Company officials said that about 1,000 management jobs would be eliminated as well as business with 5,000 contractors beginning in January.

Alcatel-Lucent CEO Ben Verwaayen said the company will invest in LTE technology because wireless carriers are planning to use the technology for their 4G networks and on a global basis. The company will also continue to invest in W-CDMA and CDMA-2000 1x EV-DO.

Along with WiMAX, the company will also reduce spending on GSM and CDMA2000 1x.

Analysts said they were surprised Alcatel-Lucent would cut spending on WiMAX, which Sprint Nextel and its partner Clearwire plan to use for their next-generation network slated to begin in March 2009.

Verwaayen said offering an open environment in regards to networks and the Web is vital to the company’s future. This will allow customers to use millions of Web sites from any device with the guarantee of security, quality, privacy and billing integrity.

"I think that is a poor decision on their part,” an industry analyst said. “They should capitalize on what they have done so far instead.”

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Source: ABI Research.