Bad News Isn't Over Yet for Nortel

Nortel's (NT Quote - Cramer on NT - Stock Picks) terrible announcement highlights just how much demand for most telecom equipment has fallen. The majority of Nortel's $1.5 billion operational loss is attributable to the company's total lack of focus. After making so many acquisitions and coming out with so many new products over the past few years, it could have only stayed profitable if demand simply remained over the top. But, as I continue to write, the nearly total lack of access to any capital by anyone but the biggest carriers has completely shifted the landscape for the equipment vendors.

The only model that's going to work at all in these terrible telco times is one of complete and total focus on a limited, best-of-class line of products. It's for this very reason I've written before that the Dells of the telecom world (companies like Juniper (JNPR Quote - Cramer on JNPR - Stock Picks) and ONI Systems (ONIS Quote - Cramer on ONIS - Stock Picks)) will suffer the least through these times, as opposed to the IBMs (companies like Nortel and Siemens (SI Quote - Cramer on SI - Stock Picks)). Even with Juniper's recent major revenue-projection revisions, the company still expects to eke out profits this quarter.

With all of the overhead, too many people and a sales force with too many products, even a slight downtick in demand can heavily impact the bottom line. When you're talking about the secular decline of the telco industry that we're seeing here, there's simply not enough revenue to flow down to the bottom line for a company with as many different products and people as Nortel has.

Nortel must further focus its research-and-development budgets and sales force on a defined set of products. In order to streamline, I expect we'll hear further announcements regarding the closing and/or selling off of other Nortel divisions over the next few weeks. For example, the company's Clarify eBusiness software is probably up for sale, perhaps to an Oracle or a Siebel. Furthermore, the company's Global Planning Services (GPS), which help service providers plan and deploy their networks, is probably up for sale to someone like IBM or EDS.

I wish I could say that Nortel's announcement marked the bottom of the fundamentals for the company, but until one of two things happens, it will continue to suffer. Either the capital markets have to become very friendly to service providers again (not gonna happen anytime soon) or Nortel has to have a model that doesn't require selling dozens of diverse products to its customer base (in progress, but still a long way off).