We are all familiar with the demise of Nortel but what is even sadder than the company folding is thinking about the customers who are stuck with their gear. No more upgrades, no replacement parts and no technical support.
Looking back, how were the decision makers to know that Nortel would file for bankruptcy in the future? Well, there were some tell-tale signs that could have been used to analyze corporate financial stability and remove Nortel from consideration, preventing the headaches that they have today.
Below are some factors to consider when selecting a vendor for Unified Communications or any IT project for that matter.
The amount of debt that a company carries can limit their flexibility to invest where needed and ultimately affect their viability. As one UC vendor writes in their filing with the SEC: “Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting obligations on our indebtedness.”
When Nortel filed for bankruptcy, it had $4.5 billion in debt (source: SEC filings).
Type of Debt
If a company has debt, the company’s creditworthiness is usually rated by a service such as Moody’s, Standard and Poor’s, or Fitch. The credit rating given reflects a company’s financial strength and/or its ability to pay a bond’s principal and interest in a timely fashion.
Each ratings service has a different rating scale but in general, bonds that companies issue can be classified as “investment grade” or “non-investment grade.” Non-investment grade bonds are also known as “junk” bonds. When Nortel announced bankruptcy back in January 2009, it had a credit rating of “B-“ (junk) from Standard and Poor’s and “Ca” (junk) by Moody’s.
However, as early as April, 2002, Moody’s had lowered Nortel’s credit rating from “Baa3” (investment grade) to “Ba1” (non-investment grade or junk). This should have been a sign to customers and prospects that there may be issues with Nortel’s corporate financial stability in the future.
Revenue growth is a good sign that a vendor’s products are being accepted in the market and gaining wider adoption. A company with flat or declining revenue may be more concerned with maintaining their existing customer base than investing in the future. When Nortel filed for bankruptcy, its revenue had gone from $11.4B in 2006 to $10.9B in 2007 to $10.4B in 2008.
The lesson learned from Nortel’s collapse is that when IT decision makers are selecting a solution, they should not only take into account standard decision making factors such as price and features, but should also include evaluation of the corporate financial stability of the vendor as well. A little homework up front can prevent a whole lot of headaches in the future.
If you’re considering the purchase of a Unified Communications solution, we invite you to review ShoreTel’s publicly available financials which show that we have no debt (and thus no debt rating) and have experienced over 30% year-over-year quarterly revenue growth for the past four quarters.