Can Nortel drag down Israeli firms?

The local telecom industry had extensive ties to the firm.

There was a time when a link with Nortel Networks Corp. (NYSE; TSX: NT) was a source of pride for Israeli companies. Companies that achieved original equipment manufacturing agreements (OEMs), cooperation agreements, or sales contracts with the Canadian telecommunications equipment maker were proud of the achievement, and justifiably so. The collapse of Nortel has changed things.

Israeli CEOs who once crowed about their ties to Nortel are now in no hurry to respond to the repercussions of its bankruptcy on their business, at least on the record. No Israeli public company has issued a notice to the Tel Aviv Stock Exchange (TASE) of any such impact, even though such an impact exists without question.

For example, VoIP equipment maker AudioCodes Ltd. (Nasdaq: AUDC; TASE: AUDC) is almost certainly one victim. Nortel was one of the company's largest customers, accounting for 17% of AudioCodes' sales in 2007, about $27 million. AudioCodes has an OEM with Nortel, which uses AudioCodes' components in its products.

In recent years, AudioCodes tried to diversify its sales channels and approached end customers directly, rather than through OEMs. However, as of the third quarter of 2008, Nortel still accounted for more than a tenth of AudioCodes' revenue, although AudioCodes does not provide exact numbers.

AudioCodes recently published a profit warning for the fourth quarter of 2008, without specifying the reason, but Nortel could be that reason.

WiMAX solutions developer Alvarion Ltd. (Nasdaq: ALVR; TASE: ALVR) is another Israeli company with ties to Nortel. In June 2008, Nortel made the strategic decision to abandon its in-house WiMAX development efforts, and signed a strategic agreement with Alvarion to create a joint solution. Under the agreement, the companies would provide an end-to-end mobile WiMAX solution that included Alvarion's mobile access gateway with Nortel's core network products.

Alvarion president and CEO Zvi Friedman said at the time, "This agreement enables us to increase our products portfolio and reach customers we couldn’t reach before. It enables us to become more competitive and increases our target market."

Alvarion did not disclose the size of the deal, but sources estimated the potential revenue at several hundred million dollars over several years. Other sources said that Nortel would transfer tens of millions of dollars to Alvarion for R&D expenses.

The effect of Nortel's collapse on Alvarion is straightforward, given the importance of the Nortel agreement. On the other hand, Alvarion may have an opportunity to increase its share of the WiMAX market at Nortel's expense.

A third Israeli victim is telephony operating support systems maker TTI Team Telecom International Ltd. (Nasdaq: TTIL), which has a current market cap of $10 million after its share fell 74% last year. TTI has a cooperation agreement with Nortel for both the global and the Israeli markets. In its expanded financial report for 2007, TTI stated that its sales were through direct channels and OEMs, and mentioned its strategic relationship with Nortel and Siemens AG (NYSE: SI; XETRA: SIE) as responsible for a "large part" of its revenue. Nortel reportedly accounted for at least 5% of TTI's revenue of $45.9 million in 2007.

Nortel Networks Israel (Sales and Marketing) Ltd. lists a number of Israeli companies with which it has cooperation or distribution agreements. They include Amdocs Ltd. (NYSE: DOX), which is a subcontractor for Nortel in the Israeli market. Since Amdocs' Israeli sales are negligible, Nortel's collapse will have little effect on the company.

Amdocs and Nortel's relationship goes back several years, when Amdocs acquired Nortel's customer relations management (CRM) unit Clarify for $200 million in 2001. Nortel had acquired Clarify for $2.1 billion two years earlier, at the height of the dot.com bubble.

Check Point Software Technologies Ltd. (Nasdaq: CHKP) and Verint Systems Inc. (Pink Sheets: VRNT have cooperation agreements with Nortel, and Radvision Ltd. (Nasdaq: RVSN; TASE: RVSN) is a subcontractor for implementing communications solutions in Israel.

In addition to cooperation agreements with Israeli companies, Nortel sold telecommunications and network security equipment in Israel. Its main Israeli distributors include Malam Team Ltd. (TASE: MLTM) unit Netcom Ltd., Bynet Data Communications Ltd., Taldor Group (TASE: TALD), Bezeq International Ltd., and ABNet Communications Ltd.

Netcom CEO Ron Brenner says that the company had long anticipated Nortel's announcement, and that it would have no material affect on the company's business.

Taldor, which had NIS 180 million in sales in 2007, chose Nortel as a strategic supplier, and Nortel's collapse may have a material effect on the company.

Published by Globes [online], Israel business news - www.globes-online.com - on January 18, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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