I'm not sure about you but the suspense about Nortel's first-quarter results is excruciating – okay, that's somewhat melodramatic but you don't get this kind of telecom suspense too often. With Lucent, Motorola and Sony Ericsson posting good quarterly results this week, all eyes will be on how Nortel fares. From the outside looking in, it appears the company has enjoyed a solid quarter with a steady stream of contract wins. The big question is whether CEO Frank Dunn and his senior management team have been able to stay focused on the business amid the accounting troubles that emerged in February. My take is Dunn's hold as CEO will be in the balance when he addresses questions from analysts following the first-quarter results. If he successfully bobs and weaves, and comes across as sincere but legally hamstrung, he could weather the storm. If, however, Dunn comes across as indecisive, testy and difficult, it could turn the investment community against him. I suspect Nortel will not answer any questions about its accounting problems until the regulatory investigations are over but that shouldn't stop Dunn from doing what he can.
Looks like the Canadian Radio-television and Telecommunications Commission may be re-thinking its expedited process to establish new rules for VOIP. Today, it announced an April 28th deadline for industry participants to make submissions has been put on hold. This could mean the VOIP process will be extended so that a more in-depth discussion and thinking can happen. The initial reaction from telecom carriers, who are clearly the most vulnerable to inroads made by VOIP, is the CRTC has already made its decision that incumbents carriers offering VOIP services will be regulated, while new players will not be regulated so competition can be encouraged.
Financial Post, April 15
Amid the regulatory investigations into Nortel Networks Corp.'s accounting troubles, there has been little attention paid to the telecom equipment maker's business and the modest improvement happening in an industry recovering from a severe three-year slump.
Granted, it is difficult to seriously look at Nortel's fundamentals when there are U.S. Securities & Exchange Commission and Ontario Securities Commission investigators looking to interview the company's executives and sift through the books.
With little information available, it is difficult for investors to tell whether Nortel is about to be engulfed in a complex accounting scandal or whether the company's independent audit committee and regulators will discover minor issues that could see it receive a slap on the wrist and be sent to a corner for a corporate time-out.
For anyone considering an investment in Nortel or trying to figure out what to do with shares they own, April 29 will be a crucial date when the company reports first-quarter results.
Nortel chief executive Frank Dunn, who has been invisible since the company disclosed last month it will likely need to re-state financial results from 2000 to the third quarter of 2003, will be available to analysts on a conference call.
There is a distinct likelihood Mr. Dunn will attempt to bob and weave around questions about the accounting problems and the regulatory investigations. This will frustrate analysts looking for insight into issues such as why chief financial officer Doug Beatty and controller Michael Gollogly were placed on paid leave last month.
With this in mind, investors with a healthy appetite for risk will have to examine Nortel's business. Investors who pursue this exercise will discover Nortel is well-positioned to capitalize on growing demand by carriers for new equipment to roll out wireless and Internet-based services.
“Their industry is improving, their competitive position is strong and continues to get better, and gross margins are historically higher than they have ever been,” said Duncan Stewart, a partner with Tera Capital. “The products Nortel seems to be best at seem to be the ones likely to grow faster than overall market, and have higher margins. From a fundamental perspective, the company is very well positioned.”
Mr. Stewart said the challenge facing investors is balancing Nortel's improved prospects with the regulatory and financial uncertainties looming over it. He said Nortel stock is worth $10 to $12 but it should trade at a 25% discount to fair value to account for the regulatory risk.
“If everything comes up roses, it goes back to $10,” he said. “If everything comes to a likely level of badness, it goes to $5. I do not see the SEC and OSC investigations culminating in the company going bankrupt. The scenario is they go into the penalty box, the stock could go to $5. I believe it is much more likely that if it goes to $5, it won't stay there long, and if it goes to $10, it will go higher.”
Nortel shares closed down 17 cents to $7.70 in Toronto yesterday. According to Bloomberg News, 20 analysts rate Nortel a “buy,” 11 a “hold” and two a “sell.”
From a business perspective, Nortel is poised to do well because of its strength in the wireless and Internet Protocol markets. In 2003, wireless sales accounted for 44% of Nortel's US$9.8-billion in revenue.
During the past couple of years, the company's willingness to aggressively invest in research and development has played a key role in helping it produce leading-edge wireless technology at a time when carriers are looking to boost the speed of their networks to launch new revenue-generating services.
This has given Nortel a competitive lead over rivals such as Ericsson Telephone Co., Siemens SA, Nokia Oyj and Lucent Technologies Inc. A big advantage is Nortel's strength in different wireless technology sectors, compared with Lucent, which has pinned its wireless hopes on a single standard called code-division multiple access.
Nortel is also benefiting from the growing interest in Internet-based technologies as carriers look to migrate their networks from older circuit-based systems. Carriers are buying Internet equipment because they can reduce costs by putting voice, video and data traffic on a single network. This makes these networks less expensive to operate and maintain.
An important driver is Internet telephony, otherwise known as Voice over Internet Protocol. Nortel should see healthy sales as carriers look to reduce operating expenses, and cable companies move into the telephony market.
Mr. Stewart said VoIP is an attractive business because it is software-intensive, which creates a large barrier to entry. It also requires high standards before the technology is adopted by carriers, which is something Nortel has established as a long-time industry supplier.
Mr. Stewart said another important issue is Nortel's ability to attract business by offering carriers new Internet telephony features such as call-waiting and 911 that can generate additional revenue.
“As Nortel comes up with solutions, it tends to lock the customers in more than selling them a photonics part,” he said. “This [business] is unlikely to be commoditized as quickly.”
While Nortel has an attractive product portfolio at a time when industry conditions are starting to rebound, its accounting and regulatory woes cannot be brushed aside.
Kevin Mitchell, directing analyst with Infonetics Research Inc., said these problems may deter customers from entering large, long-term deals until the investigations are completed.
“I don't think anyone thinks they will go out of business but one of the chief concerns is financial stability of technology suppliers, and it will be a question mark and a red flag for a while until it's resolved,” he said. “Nortel has been clicking and doing pretty well. [The accounting and regulatory investigations] are an unfortunate stain on their record. These things can drag on for quite some time, and it can hurt larger three- to five-year deals service providers would sign.”
After much speculation, Vonage is finally coming to Canada – joining Primus in the VOIP market. Aside from the intriguing geek factor, the prospects for Vonage and other Internet telephony providers is likely limited north of the border because Canada's residential phone prices are so low. This eliminates the marketing tool Vonage has been leveraging in the U.S. where its prices are about 20% to 30% below incumbent carriers. If, for example, you compare Vonage's prices with Sprint Canada, it's a financial wash if you include a package that includes 200 minutes of long-distance service and three calling features. Until the CRTC does away with the price-cap regime, there will be little wiggle room for VOIP players to gain a foothold.
It should also be noted that Vonage's success in the U.S. should be described as modest with 135,000 subscribers. While it's apparently adding 20,000 customers a month, Vonage is a long way from replicating the subscriber growth of emerging high-tech companies such as NetFlix, Tivo and XM Radio. Vonage's real success is its ability to raise US$105 million of venture capital, which talks to the entrepreneurial skills of founder Jeffrey Citron.
Everyone knows there's no such thing as a free lunch, and Gmail is a perfect example.
Google plans to launch a Web-based e-mail product in a market already dominated by Microsoft Corp.'s Hotmail and Yahoo! Inc.'s Yahoo Mail. To attract consumers and stake out its own distinct turf, Google will provide Gmail users with 1,000 megabytes of storage space — compared with Hotmail's two megabytes and Yahoo's six megabytes.
Most people will not come close to using 1,000 megabytes of storage — unless they want to store hundreds of MP3 songs and thousands of photographs online — but Google needs something to differentiate itself and memory is getting less expensive by the day.
The catch, however, is Google's plan to scan Gmail messages so it can present targeted advertising. People who write e-mails about vacations to Mexico could, for example, see banner ads for Expedia.com or Travelocity. com. Google is trying to address the age-old issue of making ad campaigns more relevant and powerful. The happier advertisers are, the more likely — in theory — they are to continue spending money.
Not surprisingly, the privacy folks are up in arms because they claim Google's scanning plans could lead to abuses. The Electronic Privacy Information Centre has vigorously complained while British-based Privacy International has filed a complaint with authorities.
Give these groups credit for ringing the alarm bells but, frankly, their efforts would be better spent fighting privacy battles elsewhere.
If you are really concerned about privacy, then don't use Gmail and don't send e-mail messages to people with Gmail accounts. It's that simple.
Google has been completely upfront about its Gmail plans. It has made no secret of the fact e-mail messages will be scanned. The way Google figures it, consumers will get a free service with lots of storage and see advertisements that appeal to their specific interests. For advertisers, e-mail becomes a more valuable vehicle with the potential to become as powerful as the search engine market which has become a lucrative business with the use of keyword-based advertising.
For Google, it is a win-win-win proposition. Consumers are happy, advertisers are happy and Google is happy if Gmail turns into another rich revenue source.
Should concerns about privacy be brushed aside? No. As long as Google remains upfront about what it is trying to do, and consumers are willing to “pay” for Gmail, there should be no problems. It is all about disclosure. Let's not forget that DoubleClick Inc. tracks the Web sites that computer users visit so it can do a better job delivering relevant advertising.
If Google discovers there is enough of a consumer backlash about its scanning plans that it attracts fewer Gmail users than anticipated, its plans will likely be quickly modified. The presence of two strong rivals in Hotmail and Yahoo will keep Gmail honest.
And while Gmail, which is apparently being beta tested by 1,000 volunteers, friends and Google family members, has attracted its fair share of buzz and media coverage, Hotmail and Yahoo will have to respond strategically. Look for both rivals to increase the amount of storage they offer, and enhance the premium fee-based e-mail services they offer.
Web-based e-mail is a competitive market with dozens of legitimate choices other than Gmail, Hotmail and Yahoo. At the end of the day, consumers will decide what works best for them. If they don't want Google snooping around their e-mail, Hotmail and Yahoo are high-quality alternatives.
There is no doubt Gmail will attract plenty of users because of the storage bonanza and Google's strong brand.
But its success is not a slam-dunk because when something is free, consumers can be fickle, and privacy might be one of those things that drives them away.
Â© National Post 2004
If there's a high-tech company on a huge roll right now, it's Research In Motion, which reported that fourth-quarter profits more than doubled, while the number of people using its Blackberry device surpassed one million for the first time. If that wasn't impressive, RIM boosted financial guidance for the first and second quarters of fiscal 2005. After Nokia disappointed the market earlier this week by disclosing its first-quarter sales and earnings will be lower than expected, the wireless industry must have let out of collective sigh of relief with the RIM news. It will be interesting to see how RIM does down the road as Palm's Treo 600, which is a very cool device, starts to gain momentum. My take is that RIM and Treo are now in the market sweetspot – wireless e-mail and Web connectivity – while Nokia is fighting feisty rivals such as Samsung in the telephone market, while struggling to get people excited about its clunky Communicator device.