Nortel sees Q3 revenue down, will sell metro Ethernet unit

Nortel expects third-quarter revenue to total around US$2.3 billion, a drop from $2.7 billion.

Nortel Networks lowered its revenue expectations for the third quarter on Wednesday, blaming delays in delivering certain products, and said it will consider selling its metro Ethernet networking business

The metro Ethernet business is in need of consolidation, Nortel said, and selling the division will provide funds for further restructuring to cut costs and maintain margins.

"This divestiture will allow us to strengthen our balance sheet and invest in areas we have identified for growth," said Nortel's President and CEO Mike Zafirovski in a conference call with analysts.

Nortel will continue to invest in research and development of metro Ethernet products while it looks for a buyer for the division, and will maintain its timetable for introducing new products, he said.

"We continue to grow profits. We're seeing strong customer momentum, particularly in 40G bps," he said.

That Nortel would want to sell a business unit doing so well is puzzling, said Yiru Zhong, an analyst with Frost & Sullivan specializing in telecommunications.

"Selling off that division does not make business sense because that's one of the growth areas," she said.

Nortel's insistence that it is looking for a cash deal could rule out a number of buyers who would otherwise be a good match, leaving cash-rich vendors such as ZTE and Huawei among the more likely candidates, she said.

Zafirovski said little about the nature of the product delays that are hurting third-quarter revenue.

"One was the completion of all the requirements to have products certified by our customers in the carrier networks business. Another was in our metro Ethernet business. As we go from one location to another location some of our products will be shipped in the fourth quarter instead of the third," he said.

Nortel now expects third-quarter revenue to total around US$2.3 billion, a drop from $2.7 billion in the third quarter last year.

Performance for the rest of the year will also be lower than expected, Nortel said, as carriers are cutting their capital expenditure plans and some enterprise customers have deferred investments in IT and optical networks. It expects full-year revenue to drop by between 2 percent and 4 percent compared to last year, whereas in August it forecast that it would grow by a similar percentage.

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Peter Sayer

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