Ericsson and Huawei stand to benefit from Alcatel-Lucent’s accelerated shift away from legacy technologies.
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 presumed 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/wireline service provider with multiple networks.
In this case, Ericsson and Huawei stand to be the primary beneficiaries of Alcatel-Lucent’s Shift Plan as they are the only two end-to-end solution providers left standing. Nokia Siemens Networks is squarely focused on mobile broadband and services after a series of divestitures and ZTE lacks the services capabilities and international footprint that Ericsson and Huawei maintain.
The Shift Plan will help Alcatel-Lucent achieve profitable growth and much needed liquidity.
On June 19, 2013 Alcatel-Lucent’s new CEO Michel Combes detailed his strategy to turn around the struggling network vendor with the unveiling of The Shift Plan. The Shift Plan 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, The Shift Plan, which runs from 2013 to 2015, calls for a massive reorganization that will transform Alcatel-Lucent into an IP networking and broadband access (mobile and fixed) specialist, rather than the end-to-end provider that exists today. Certain aspects of the program were already in place, including selling non-core assets and transitioning away from legacy technologies, but The Shift Plan accelerates this transition.
By 2015 Alcatel-Lucent will have a sharp focus on the IP division (which includes IP Routing, IP Transport, IP Platforms and related services), which will be managed for profitable growth. Meanwhile, the company will leverage its Broadband Access segment (mobile and fixed access) for cash as it sets the stage for its push in IP.
Alcatel-Lucent expects IP Networking to make up over half of revenue and profits in 2015 and has set a growth target of 15 percent annually and operating margin target of 12.5 percent. Alcatel-Lucent’s remaining businesses will be focused on generating positive cash flow and is targeted to achieve €250 million in positive operating cash flow in 2015. These initiatives, as well as asset divestitures and debt reprofiling appear to be enough to reverse the company’s cash burn and lay a solid and sustainable financial foundation.
Combes has yet to identify which assets will be up for divestiture, but the most likely candidates remain the Submarine, Strategic Industries, and Enterprise units, all of which are housed under the Focused Businesses segment.
Alcatel-Lucent aims to raise over €1 billion from asset sales over the next two years and should be able to reach that goal through the sale of the aforementioned units. The cash will help the company reduce its debt load by €2 billion over the next two years.
With The Shift Plan comes changes in the company’s management structure. Combes is keen on hiring likeminded executives that do not necessarily have direct ties to the telecom networking industry.
Philippe Guillemot, a former executive at Michelin and Valeo, will join the company as senior executive vice president of Operations while Paul Tufano, Alcatel-Lucent’s CFO since 2008 and COO since 2H12, will leave the company after The Shift Plan is implemented.
TBR believes The Shift Plan represents a positive step in Alcatel-Lucent’s bid to achieve consistent profitability and cash flow. Michel Combes has the background to execute the plan swiftly and efficiently, 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. It will also enable Alcatel-Lucent to become self-sustaining, meaning the company will not need to continue taking on new debt to survive.
Michael Soper, Networking & Mobility Analyst & Chris Antlitz, Networking & Mobility Analyst at Technology Business Research