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Nortel Sees the Light

How to manage a $21 billion company growing by 40 percent a year.

When Frank Dunn joined Nortel Networks Corp. as a management trainee out of college in 1976, the company was still known as Northern Electric. It had revenues of $1.1 billion and sold most of the circuit switches, transmission gear, and phones it manufactured to parent Bell Canada Enterprises (BCE), the Ma Bell of the north.

How things change. Dunn, after working in virtually every division of the company over the past 25 years, was appointed CFO at the beginning of last year. And Northern Electric became Northern Telecom became Nortel Networks–now an independent company and one of the premier suppliers of telecom equipment to the voice and data networks of the world.

The road to independence started when Bell Canada realized its equipment manufacturing arm could win much more business as a stand-alone company–much as did AT&T with Lucent Technologies Inc. In 1973, BCE sold 9.9 percent of Nortel to the public. It sold off its remaining 38 percent stake this past May.

In the past five years, Nortel has been on a tear. Revenues have increased from $9.8 billion to $21.3 billion last year, and its customer base has expanded from the regional phone companies and long-distance competitors to include competitive local exchange carriers, wireless networks, and Internet and application service providers. The Brampton, Ontario-based company has been outgunning chief competitor Lucent in the job of overhauling telecom networks intent on delivering ever-more information to consumers and businesses.

Nortel has not only avoided the organizational upheaval that Lucent is now experiencing, but is also growing nearly as fast as Cisco Systems Inc. In fact, many believe Cisco, king of the enterprise networking market, is now the only competitor that can stop Nortel from grabbing the bulk of the expected boom in future capital spending by telecommunications carriers. With an early and lengthening lead in optical networking products–the hottest tech sector going–Nortel has a good shot at doubling its revenues to $40 billion by 2001.

No surprise that Nortel, whose shares rose from under $10 in late 1998 to a peak of $86 last May, has also become a bellwether stock for the technology market. The company recently sparked a nearly 200-point slide in Nasdaq when optical sales growth was slower than expected in the third quarter. Add to that the recent financial hardships in the telecom service market, and Nortel’s shares have dropped by almost 50 percent in the past five months.

Dunn, however, doesn’t worry much about short-term reactions in the market. “The valuations will come if we keep doing the right things,” says the 46-year-old CFO. Dunn recently spoke with senior editor Andrew Osterland about what the right things are and about the challenges of managing a $21 billion company growing at 40 percent per year.

Wall Street was obviously disappointed with Nortel’s third-quarter results. How would you characterize the quarter?

At the end of Q2, we gave guidance on growth of the low 40 percent range for revenues, and high 30 percent for earnings. When we delivered 42 percent on the top line and 64 percent on the bottom, we thought it was a solid quarter. The Street obviously thought we’d blow through those numbers. But nothing has changed in our outlook for the business.

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