Alcatel-Lucent’s improved Q2 2013 results demonstrate that the company’s Shift Plan and bet on IP Networking will pay off.
Alcatel-Lucent delivered improved financial results in 2Q13, highlighted by revenue growth and a positive operating margin. However, the company’s gross margin continues to lag peers and is unlikely to grow substantially until margin-unfavorable businesses are reduced (Optics) or divested (Submarine).
The company’s efforts to improve operating margins are paying dividends, particularly its decision to restructure 15 underperforming managed services contracts. Over the past year, managed services operating margin grew from -11.1 percent to -1.4 percent. Additionally, the initial results from Alcatel-Lucent’s bet on the IP division are positive. The division reached a record 17.3 percent of total revenue, grew 20.1 percent year-to-year and was the driving force behind Networks & Platforms’ 270 basis point operating margin recovery.
Revenue growth prospects beyond 2013 remain murky. Leveraging its Tier 1 operator install base in the U.S., the company will continue to grow this year, but growth will be more difficult to achieve in 2014 when both AT&T’s and Verizon’s initial mass LTE deployments will be complete.
Alcatel-Lucent will leverage the Shift Plan to achieve profitable growth within the next two years and bring much needed liquidity
Alcatel-Lucent’s new CEO Michael Combes unveiled the Shift Plan in June, outlining his strategy to enable the company to achieve consistent profitability over the long term. The Shift Plan, which will run from 2013 to 2015, will see Alcatel-Lucent embark on another round of restructuring, which has been a near-constant since the joint venture’s inception in 2006.
Unlike previous efforts, however, the Shift Plan calls for a massive reorganization that will transform Alcatel-Lucent into an IP Networking and Broadband Access specialist, rather than the end-to-end provider that exists today. Certain aspects of the program are already in place as part of the Performance Program restructuring initiative, including selling noncore assets and transitioning away from legacy technologies, but The Shift Plan accelerates this transition.
TBR believes The Shift Plan represents a positive step in Alcatel-Lucent’s bid to achieve consistent profitability and cash flow. As the former CEO of Vodafone’s Europe Region, Michel Combes has the background to swiftly and efficiently execute the plan, which is necessary to stabilize the company.
The Shift Plan will usher in a more nimble Alcatel-Lucent that can quickly respond to market and technology changes, including capitalizing on burgeoning opportunities in cloud and software-defined networking. For example, Nuage Networks, Alcatel-Lucent’s SDN venture, is participating in active trials with potential customers in North America and Europe.
The Shift Plan will also enable Alcatel-Lucent to become self-sustaining, meaning the company will not need to take on new debt to survive. However, the company articulated its willingness to access the debt markets should favorable opportunities arise.
The company re-profiled its debt between April and July 2013, giving Alcatel-Lucent less than €450 million in debt maturing before 2016. The company also received €621 million in proceeds from a new debt offering maturing in 2018. This cash will help Alcatel-Lucent pay for its costly restructuring program.
Alcatel-Lucent’s accelerated shift away from legacy technologies could help competitors take market share
The Shift Plan does not come without risks. Alcatel-Lucent is significantly paring back its portfolio by accelerating its transition away from legacy, which is to include such technologies as GSM, CDMA and copper access.
Service providers that continue to operate legacy networks may feel that a slimmed-down Alcatel-Lucent would not have the capabilities to support the scale and complexity of a converged wireless and wireline service provider with multiple networks, which could lead to customer defections.
However, Alcatel-Lucent is limited in its ability to slim down its legacy portfolio because it holds longstanding agreements with certain key customers – including AT&T, Orange, and China Unicom – to continue providing 2G and 3G infrastructure.
Michael Soper, Networking & Mobility Analyst