Alcatel-Lucent's (NYSE:ALU) long-awaited restructuring blueprint arrived in June as promised, and while the plan offers hope for the future, it also comes with significant risks as the company hones its focus and stops trying to deliver all things to all customers.
The company's new CEO Michel Combes unveiled a massive restructuring of the company's business focus and balance sheet, with a new emphasis on several core areas in IP networking. In wireless, the company increasingly targets LTE and small cells and moves away from investing in legacy technologies. This so-called Shift Plan is aimed at producing cost savings of about $1.34 billion as well as another $1.34 billion gain from unspecified asset sales.
Investors appeared to support Alcatel-Lucent's new strategy, driving up the share price in Paris more than 5 percent on Wednesday after the plan was divulged, but some analysts caution that it is too early to tell whether the plan will be enough to rescue the struggling vendor.
"I don't find the plan as radical as it should be," said Aleksander Peterc, an analyst at Exane BNP Paribas, who was quoted by the New York Times. "This plan is not really very much different than the last ones. The overwhelming question is whether it will radically cut costs, as it claims. This is a step in the right direction, but time will tell."
Michael Soper and Chris Antlitz, analysts with Technology Business Research, said the Shift Plan will help Alcatel-Lucent achieve profitable growth and much needed liquidity.
"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," they wrote.
Yet there are inherent risks in the plan as well. According to Ron Kline, principal network infrastructure analyst at Ovum, "Given the extent of the installed base of legacy products and the relevant customers, accelerating an exit could prove difficult." He said the vendor tried to rationalize its product portfolio in 2006 after Alcatel and Lucent merged but customer protests made the company reverse its decision.
Further, if Alcatel-Lucent succeeds in significantly paring back its portfolio, that may lead service providers to conclude that the company cannot support the scale and complexity of a converged wireless/wireline service provider with multiple networks. If its plan backfires, Alcatel-Lucent may be opening the door to more business for rivals Ericsson (NASDAQ:ERIC) and Huawei, which will are now "the only two end-to-end solution providers left standing," said Soper and Antlitz.
ZTE, they noted, lacks the services capabilities and international footprint of Ericsson and Huawei, while Nokia Siemens Networks (NSN) has scaled back considerably and is squarely focused on mobile broadband.
However, one must admit that NSN's vision of the infrastructure business has proved quite prescient. Back in May 2012, NSN spokesman Barry French said during a press roundtable that other infrastructure vendors would need to follow NSN's lead and "adjust their cost structures" to the new reality of plummeting profit margins and tight competition. That certainly has proved true in the case of Alcatel-Lucent.
And despite optimism about Alcatel-Lucent's new strategic direction, it still faces crushing cash flow issues. A Bloomberg headline encapsulated the problem, saying, "Alcatel-Lucent's cash woes won't go away."
During 2013's first quarter, restructuring costs and a wait for payments on commercial contracts slammed Alcatel-Lucent, as the company burned through $694 million in cash. But the vendor contends it can turn around the problem.
"A strategic focus on cash management in wireless, fixed access and other businesses--emphasizing investment in 4G LTE, vectoring and fiber-based access systems while significantly reducing R&D spending on legacy technologies--is expected to deliver positive segment operating cash flow of more than €250 million ($331.8 million) in 2015," said Alcatel-Lucent.
Soper and Antlitz agree that Alcatel-Lucent's new business focus plus its planned asset divestitures and debt reprofiling "appear to be enough to reverse the company's cash burn and lay a solid and sustainable financial foundation."
Putting in my two cents, Alcatel-Lucent should have made these radical changes back in 2011, when NSN bit the bullet and refocused its business. I suspect the Shift Plan may not be too little, but it may be too late. If so, that could leave Alcatel-Lucent's top rivals laughing all the way to the bank.--Tammy