Thu Aug 19, 2004
By Susan Taylor

OTTAWA, Aug 19 (Reuters) - Nortel Network Corp.'s (NT.TO: Quote, Profile, Research) new growth recipe may strike a sour note with Wall Street because it does not center on profit margins, but a focus on cash and costs will better serve the telecom equipment giant, its CEO told Reuters on Thursday.

As part a sweeping overhaul that will cut another 10 percent of its staff, or 3,500 jobs, chief executive William Owens said Nortel will pursue service contracts and equipment deals in developing countries.

Both those markets feature lower profit margins, with services in the 20 percent to 25 percent range, compared with Nortel's traditional sales.

"Should I have concern about what the market thinks about my margins if I'm generating a lot of cash?," Owens asked in an interview with Reuters. "My approach has been cost and cash. Generate cash, reduce costs so you can compete in the marketplace."

The company, still in the shadows of an accounting scandal that will see it restate faulty results for a second time, estimated its gross margin at 43 percent in the first half of 2004. On Thursday, it also reset earlier forecasts for 45 percent margins to between 40 percent and 44 percent for 2005.

Lower-margin growth in strategic areas has advantages, said Owens. Service revenues generate strong cash flow, for example, and deals in developing countries can gain a foothold in high-growth areas.

"My tendency is to think about cash, cost and revenue generation and not to be as focused as many in the industry are on gross margins, which tell you little about the composition of the company," Owens said.

"As you grow the business and you grow the cash, a lot of things happen. You become more powerful, in the sense that you can participate more aggressively in a consolidating marketplace."

Nortel is already signing "large" deals for its network equipment in developing countries, he said, where there is fierce competition. Margins may be lower in the first year or two of such deals, but the markets are "enormously important" for future growth, he added.

Services play an equally important role.

"I've talked to enough carriers to know that this is something that many of them would be interested in," he said.

"Especially if you were going out in a new country to put in a wireless network (and) perhaps a part of that bid would be to say 'I not only want to bid for putting in the network, but operating it for the life of the network'."

Nortel is not currently pursuing large service contracts with major U.S. carriers, Owens said, adding that would be "much more difficult".

The company will also set up a new group so that it can chase government and defense contracts, said the CEO, a retired U.S. admiral and former vice chairman of the U.S. Joint Chiefs of Staff.

That will put it head-to-head with major systems integrators fighting over a sector he estimates is worth as much as $60 billion to $100 billion annually in the United States.

Mortgage Rates News, Mortgage News, Financial News