VideoWhen 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.
How has Nortel itself changed from the Northern Electric you joined in 1976?
Nortel's strength is that we see where we want to go and we value our conviction. We really believe the valuations will come if we keep doing the right things. We're generally first off the mark on where the market is going, and I think that's put the company where it is today, growing at 40 percent-plus per year.
For example, we were the first to come up with a digital switch. We decided that was where the window [of opportunity] was, that digital was better than analog or electronic switching. And we invested very heavily back in the late 1960s and early 1970s to come up with a product that would give us a leadership edge.
The next major breakthrough was to invest very heavily in the high-speed optical backbone network. When everybody else decided that 2.5 gigabits was more than enough speed for telecom networks, we decided that we wanted a 10-gigabit system. We came out with our OC-192 product back in late 1996, when a lot of our major competitors were still struggling to get it out the door. It's on its third hardware platform and seventh software release. Now we're bringing out a 40- and 80-gigabit network. Obviously, it was Lucent that failed to meet that challenge; they stuck with their 2.5.
At the same time, we get out of things we don't believe can differentiate us in the future. We used to make a lot of the power equipment that goes around a lot of the various outside plant capability. We used to be in the fiber-optics manufacturing business. We used to have Nortel-branded phones. We don't do any of those things anymore. Our mindset is, if somebody else can do it just as well as we can, let them do it. We have to do things that no one else can do.
How did the Bay Networks acquisition fit into your first-mover philosophy?
Back in 1998, we saw that the world was changing to a packet environment, away from a circuit-switched environment. You can't transmit data cost-effectively and in huge volumes over a circuit-switched network; you've got to go to an Internet protocol (IP) core. So we decided we needed IP and routing capability to complement our strengths. And we decided that the company that had the technical capability was Bay Networks.
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