Alcatel-Lucent's Turn Around
Hans is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Alcatel-Lucent (NYSE: ALU) seems to have been going through permanent restructuring since the merger between Lucent Technologies and Alcatel was completed at the end of 2006. This uncertainty and continuous change needs to stop for Alcatel-Lucent to turn the business around.
If Alcatel-Lucent is going to be successful, it needs to define what it is, once and for all. For too long it has tried to be the one stop shop for everything and everyone. As a result, it has created a reputation as the “Jack of all trades, Master of none.”
When you think of Ericsson (NASDAQ: ERIC), you immediately know that you are speaking to the leader in wireless network infrastructure, managed services, and a company that is in the process of transforming itself into a telecom OSS/BSS power house. But Ericsson is also quietly laying off 1,500 of its people, and its results have not been that stellar.
In November 2011, Nokia Siemens Networks announced 17,000 lay-offs by 2013, or almost 25% of its workforce. After 4 years of operating losses, NSN concluded it had digressed too far away from its core business. As part of the restructuring program, they have also publicly committed themselves to returning to their core business: mobile (broadband) infrastructure and services.
Despite these facts, the market views two of Alcatel-Lucent’s biggest competitors as relatively positive. In the mean time, Alcatel-Lucent is struggling to keep its head above water and its share price above $1. Why? I think it is because the market understands Ericsson's and NSN's identity and the recovery path they are on, and that allows them to measure progress. With Alcatel-Lucent, it is all still too cloudy beyond another reorganization and a round of lay-offs.
I think Alcatel-Lucent can be a very lucrative turnaround story if its true identity can resurface. It has many core elements in place that could cause it to come roaring back:
- The IP unit is absolutely second to none. It is the rock star of the company. 20% year over year growth.
- The Optical unit has captured the #1 market position in the highest growth segment: 100G.
- The Wireless unit is leading the industry with its lightradio (a mini 4G LTE base station that can be placed on walls, on top of light poles, etc) architecture.
- In three to four years CAPEX investments in small cells are expected to be $2 billion annually. In the US, Alcatel-Lucent already won a major deal with Sprint (NYSE: S), which is in the midst of an estimated $4 billion multi-year 3G and 4G LTE network improvement initiative. This set Alcatel-Lucent up perfectly for wins with Verizon (NYSE: VZ) and AT&T (NYSE: T), who recently announced an increase in capital spending to $22 billion per year through 2015 from an estimated $19 billion in 2012.
- Following a decade of failure to capture market share in macro wireless networks, Alcatel-Lucent's wireless unit finally seems to be capturing a sizable piece of the pie in 4G LTE, including wins in Latin America with America Movil and Oi, and in China with China Mobile.
- The Wireline unit, in difficult times, continues to grow at 16% annually.
- Bell Labs – Innovation, Innovation, and Innovation.
The right sized and focused business can be a very profitable one.
What I want to see as a potential investor is Alcatel-Lucent taking bold decisions that will define its identity. Alcatel-Lucent has to re-create its “go-to brand.” I want that brand to be about building end-to-end seamlessly integrated networks that drive the best business value to its customers. No more distractions. No more diversifications. Do what you are good at, and strive to become better at it every day.
That is the right formula as network operators are rethinking their entire network architectures and business models because they will continue to have to deal with the massive data usage explosion that is clogging up their networks, which have become too complex and too expensive to maintain and support.
Ericsson cannot do this. Nokia Siemens in its new model cannot do this. Huawei can, but I am confident that as a leaner and more focused business, in head to head competition, Alcatel-Lucent would beat Huawei more than half the time. It has proven it can beat the Chinese in Latin America, where it is growing in the lower double digits the past 3 years in fierce competition with Huawei and ZTE.
I want to see Alcatel-Lucent exiting everything that has nothing to do with what should be its core business, including:
- Exit Enterprise. Not Alcatel-Lucent’s core customers.
- Exit Managed Services. Not a few of the contracts. All of them.
- Exit Applications. Not core to the business.
- Exit non-core geographies, which is already part of the restructuring program.
- Stop reselling third party products or services. The margins are terrible. Instead, commit to a channel program for the long haul for the countries it is exiting.
Alcatel-Lucent has to become what it has forgotten it was, an end-to-end Network Infrastructure vendor for telecom service providers driven by the industry’s best and brightest innovators: Bell Labs.
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