Nortel takes another step toward clarity

The shedding of Nortel Networks’ UMTS access business adds more clarity to the company’s priorities as it continues to evaluate which markets it will invest and compete in and which it won’t. The company will continue to focus on mobility in the areas of CDMA, GSM and LTE, with a greater focus on 4G. Meanwhile, it will aggressively pursue enterprise markets and the services business.

In a note issued this morning, UBS Investment Research called Nortel’s UMTS access sale “the first major step from [Nortel’s Chief Executive Officer Mike Zafirovski] consistent with his strategy of focusing only on areas where Nortel can be a meaningful player.”

In February, Zafirovski vowed to commit Nortel only to markets in which it could hold a 20% share. But he also highlighted three areas in particular that he felt were critical to the company’s future: WiMax, IMS and IPTV.

Since that time, Nortel’s optical business has been growing (up 30% sequentially in the second quarter and up 7% from a year earlier), and the company created a new metro Ethernet division. Both areas fall outside the three Zafirovski listed as priorities, leading some analysts to wonder aloud whether Nortel is still reaching too broadly.

As Nortel’s chief strategy officer, George Riedel, explained in June, “Those three areas--WiMAX, IMS and IPTV--aren’t the three pillars of the company going forward. I’d characterize them as important new investment areas we launched earlier in the year that fit in the broader context of the strategic plan--a subset of the strategic plan.”

Backing out of the UMTS access business--where Nortel has only 2% of the market--lets Nortel focus more intently on other mobility areas. The company will continue selling UMTS core gear

Although some employees dedicated to Nortel’s UMTS business will be transferred to Alcatel as part of the deal, remaining resources that were previously dedicated to UMTS will now be redirected to other Nortel efforts, Zafirovski said today. UBS estimated the company’s UMTS access business--which is being sold for $320 million--generated annual revenue between $400 million and $500 million and losses up to $200 million.

When asked today whether Nortel would need a partner in order to continue selling its core UMTS business without the access portion, the company pointed to a sale of strictly core UMTS gear to Cingular Wireless earlier this year.

The sale of the UMTS business follows another step toward clarifying its business focus Nortel took earlier this summer. The company affirmed its commitment to enterprise markets with a Microsoft partnership aimed at co-developing and cross-licensing intellectual property to bring unified communications solutions to business customers.

“This is part of our business transformation,” Zafirovski said in a press conference today, citing both the MicroSoft alliance and the sale of its UMTS business announced today.

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