Mark Evans

Analysts Diss Nortel-PEC deal

It took a day for Nortel analysts to get a handle on the company's US$455-million all-cash acquisition of PEC Solutions but there is now a verdict: they hate it. It has been quite some time since I've seen so many analysts be so negative about an acquisition but it was all there in black and white as the research started to surface. So what don't they like? For starters, they are having a difficult time figuring out why Nortel would buy an IT services business in a market - the U.S. government - that is growing by 4% a year. Nortel is buying 1,700 people so it can sell more telecom equipment to the U.S. government. The big problem with people - unlike hard assets - is they tend to leave. While it is important to be able to service clients, the feeling is Nortel could have better off focusing on a more dynamic market.
The most damning part of the analysts' critique today was the focus on whether Nortel CEO Bill Owens is the right person for the job, and the company's inability to articulate a vision for the future. Scotia Capital Gus Papageorgiou was the most blunt when he essentially accused Owens of being in over his head and falling back on his own background - U.S. military - in making such a major purchase rather than what is good for Nortel. For an equity analyst, this is , but refreshing, behaviour.
Hopefully, Nortel will offer some insight into its big-picture plans by Friday, which is the self-imposed deadline it set to release 2004 fourth-quarter and full-year results. Analysts have a lot of questions and growing concerns. With the analysts picking apart Owens' first major strategic initiative, you wonder how long it will be before Gary Daichendt, Nortel's highly-regarded president and COO, gets the CEO job.

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Salvation for Mobile Couch Potatos

Do you really think people will watch a 30-minute sit-com on a wireless device? It's not something I would ever do but some analysts believe there are couch potatos who will need to get a TV fix while on the road. ABI Research's Alan Varghese is a mobile TV believer, although he concedes most usage will be short video clips. He said, however, that “for die-hard fans, watching their favorite half hour sitcom is not out of the question.” Varghese also throws out a physical theory about mobile TV's potential, suggesting the optimum TV viewing distance is 5x the screen size. Using this formula, he argues mobile devices are perfectly suitable for on-the-go TV.
What may put Varghese and I in different camps is I don't watch much TV - other than Deadwood, Arrested Development and - when the NHL is not on strike - the Toronto Maple Leafs. As a result, it may be difficult for me to relate to people who may watch 10, 20 or 30 hours of TV a week. For these people, maybe the ability to watch “Survivor” or “Desperate Housewives” while you're waiting to catch a flight is a pleasure worth paying for - even if it means looking at a small screen. You should never under-estimate how the mass market behaves, and never under-estimate the power of TV.
In other TV-related news, I was listening to CBC radio today about a device called TV-B-Gone that lets people to turn off TVs in public places such as bars and restaurants. It was interesting to hear there was little reaction when a TV was turned off in a bar - suggesting TV can often be more background noise than anything else.

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1,100 VOIP SPs and counting….

According to research done by Sandvine Inc., there are more than 1,100 VOIP service providers around the world - ranging from large telcos and cablecos to local “mom and pop” operations and free services from firms such as Skype. Sandvine came up with this eye-catching statistic after analyzing data traffic moving across its global network of ISP customer sites, which account for more than 20 million broadband subscribers worldwide. Sandvine, which provides a variety of services to ISPs such as traffic management technology, said the growth of VOIP traffic means there will be serious quality of service challenges to broadband service providers. “The failure or success of VoIP offerings depends on the level of QoE that a service provider can achieve and sustain, so network managers must determine very quickly how QoE can best be quantified and ensured,” Sadvine opined in a press release.
Om Malik makes an excellent point that if you assume there will be three million VOIP subscribers in the U.S. by the end of 2005, and that the cablecos and Vonage will have two million customers, it leaves hundreds of VOIP SPs battling it out for the rest. Yikes!
For people not familar with Sandvine, its founders started a company in Waterloo, Ont. called Pixstream Inc., which was acquired for nearly US$400-million in 2000. Four months later, Cisco closed Pixstream as part of a corporate restructuring that saw the elimination of 8,000 employees. It was a strange move given Pixstream was originally only looking for a small investment from Cisco but the deal expanded when Cisco made it clear it wanted the whole kit and kaboodle.

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Cisco Acquires Sipura for $68M

I'm starting to get a better idea why there is a lack of VOIP IPOs - before a company gets to go through the process, it gets snapped up. The latest “victim” is Sipura Technology Inc., which makes VOIP adaptors (a.k.a ATAs). It has accepted a US$68 million cash and options deal from Cisco, which will integrate Sipura into its Linksys SOHO division. This deal isn't a surprise given Sipura's founders also started Komodo Technology, which was acquired by Cisco in mid-2000 for US$175-million. When Jan Fandrianto and Dr. Sam Sin left Cisco to start Sipura, Cisco struggled in the ATA business. As a result, buying Sipura now makes complete sense if Cisco wants to stay in the game. Let's see how long Frandrianto and Sin stick around this time.
This deals comes on the heels of Juniper Networks buying Kagoor Networks for $67.5 million last month. Kagoor had sales last year of $5-million.
One day, it would be nice to see a VOIP IPO but maybe the capital markets landscape isn't friendly enough these days. Or perhaps small companies are troubled by the cost of being publicly-traded given the demaands of Sarbanes-Oxley. Maybe Vonage will be the IPO guinea pig later this year - although I believe it will be acquired before that will happen.

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VOIP Blocking Alive & Well

Reports about VOIP traffic being blocked by network operators are becoming more common in wake of Telmex customers complaining their telephony service is being degraded. In the United Arab Emirates, Internet users are complaining they have been unable to access Skype.com to buy SkypeOut minutes. The culprit seems to be Etisalat, the UAE's only ISP. In the U.S., there have been reports that Vonage's service is being blocked by Clearwire, while Madison River was fined $15K by the FCC after Vonage filed a complaint. In Canada, the major broadband operators have promised the CRTC they will not engage in this kind of nefarious activity.
Earlier this month, Vonage CEO Jeff Citron said he wants a broadband bill of rights to give consumers the right to access any service or application they want. While it is a self-serving approach, he makes a very good point about a troubling situation.

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Nortel Makes Acquisition

As part of its strategic appetite for more U.S. government business, Nortel is spending US$448 million to buy an IT services firm, PEC Solutions Inc. “Nortel is playing to win….,” said Nortel CEO Bill Owens, who appears to have made this phrase a corporate mantra given how often it has appeared in press releases recently. PEC makes it money by selling consulting and system integration services to homeland security, law enforcement, intelligence, defense and civilian agencies. In 2004, PEC had profits of $16.4 million on sales of $202.7 million but its profitability has declined for the past two years. Nortel's willingness to snag PEC is reflected in the sweet premium it is offering. Nortel is offering $15.50 a share for PEC, which closed yesterday at $11.31 on Nasdaq.
It is an interesting deal for a couple reasons: one, it is focused on services rather than technology. As competition in the equipment market becomes more intense, services are now an important differentiator. Huawei, for example, can sell inexpensive equipment but it has a hard time matching blue-chip suppliers when it comes to servicing clients. While this is a logical move for Nortel, it stll has some technology holes to fill, particularly in the router and IP market. There are rumors the Neptune router may not make its official debut until later this year, while a partnership with Avici Systems appears to be struggling given Avici's troubles.

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Investors Pour into Solace

Solace Systems, which has developed a router for carriers that lets them deliver the IP-based traffic of corporate customers to the right place at the right time, has raised a whack of cash from a blue-chip list of investors. The group includes entrepreneur Terry Matthews, EdgeStone Capital Partners and Ontario Teachers' Pension Fund Private Capital. The Ottawa-based company did not, however, unveil how much money it had raised - citing competitive reasons. But one could speculate it was at least $20-million given this is a round focused on sales and marketing rather than R&D. The big money tends to pour in when customers and revenue are materializing. Solace believes it's only direct competitor is Cisco Systems, which makes one think Solace is perfectly positioned for a takeover offer from a Nortel or Alcatel.

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European Carriers Capex to Climb 6%

Telco equipment vendors looking for good news will be buoyed to hear spending by European ILECs, CLECs and wireless service providers are expected to rise 9% this year, according to Infonetics Research. There will be aggressive spending on access aggregation equipment, IP/MPLS routers and voice equipment. While 9% may not seem like a big increase, it's large - relatively speaking - given the low-single digit growth and negative growth seen from 2001 to 2003. Infonetics said that European SPs are now spending 13% of revenue on capex, and this ratio will continue through 2005.

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Shaw Moves into Edmonton

After launching cable telephony in Calgary in February, Shaw Communications is moving into Edmonton. By the end of the year, Shaw should have expanded into every major Western Canadian market. During a conference call earlier this month, CEO Jim Shaw made it clear the company wil stick to its $55 a month plan rather than drop prices to win market share. More details on the Edmonton launch later today.

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Nortel's Q4 & 2004 results

As Neil Young kind of sang about Nortel “This week's the week, this week's the week, yeah, yeah”, Nortel is supposed to report is fouth-quarter and 2004 results before the end of April, which only leaves it five business days. While most of the details have been released, these results should give analysts a much better handle on Nortel's sales momentum and gross margins. As much as Nortel is trying to put the accounting scandal behind it while restructuring senior management, there is still trouble on the near horizon: intense competition from traditional rivals such as Alcatel and Cisco, as well as low-cost Chinese suppliers such as ZTE Corp. and Huawei Technologies armed with billions in vendor financing.
It will also be interesting to see if Nortel holds an analyst call after declining to do so after the third-quarter results were released. With its accounting woes attracting investigations from the SEC, Ontario Securities Commission, Royal Canadian Mounted Police and FBI, Nortel is still holding its financial cards very close to its chest. If it goes ahead with a conference call, analysts may hear the facts and nothing but the facts - with little insightful “colour”.

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