Alcatel-Lucent unveils radical restructuring plan, will focus on LTE, small cells in wireless

Alcatel-Lucent (NYSE:ALU) CEO Michel Combes unveiled a massive restructuring of the company's business focus and balance sheet, intent on reversing seven years of losses at the vendor. He said the company will become more of a specialist by focusing on several core areas in IP networking, and in wireless it will put more emphasis on LTE and small cells and move away from investing in legacy technologies.

alcatel lucent CEO Michel Combes

Combes

Combes, who the reins at Alcatel-Lucent in April, said the company's new "Shift Plan" will target around $1.34 billion in cost savings and will result in another $1.34 billion in unspecified asset sales.

Further, to bolster its finances, Alcatel-Lucent will refinance around $2.68 billion in debt to repay a loan it secured in January, and may also raise another $2.68 billion down the road to repay those debts, perhaps via asset sales or a share sale known as a rights issue. The company's stock rose on news of the plan. Alcatel-Lucent said CFO Paul Tufano will leave the company once the plan is underway; it did not identify a successor.

In terms of how Alcatel-Lucent's businesses will be trimmed down going forward, the company said that it will focus on growing its "Core Networking" segment (IP routing, IP transport, IP platforms and associated services) while its "Access" segment, including wireless and fixed access, will be "managed for cash" and focused on high-speed broadband. The company said IP Networking and "Ultra-Broadband Access" will represent 85 percent of its research and development investment in 2015.

"Our intent is obviously to reduce significantly our spend in legacy technologies in order to fuel our development of these new technologies," Combes said in a conference call with reporters, according to the Wall Street Journal. "It is a clear strategic turning point for the company."

The company's goal is to generate positive cash flow by 2015, and part of that will require slimming down its "Access" business to generate cash, if not necessarily more sales. The company said it will be "emphasizing investment in 4G LTE, vectoring and fiber-based access systems while significantly reducing R&D spending on legacy technologies."

Alcatel-Lucent said it expects its IP Networking business to have annual sales of more than $9.4 billion and an operating margin of more than 12.5 percent in 2015, up from sales of $8.2 billion and an operating margin of 2.4 percent in 2012. The company did not provide similar forecast for how the segment with its wireless business will perform.

Alcatel-Lucent said the plan will allow it to target a wider range of customers beyond its traditional base of large carriers. The company plans to redesign its sales and marketing strategy to take advantage of the new focus on IP and the cloud, which it said will allow it to better address Tier 2 to Tier 4 carriers.

The vendor did not specify how many job cuts the plan might entail, and Combes said discussions will start with unions representing workers. "To deliver on this strategic plan, we need to regain competitiveness--that means having the right products, quality of execution, and lowering our costs to be similar to peers," Combes said, according to Reuters.

Analysts had mixed reviews of the plan. Exane BNP Paribas analyst Alexander Peterc told Reuters he was hoping for more emphasis on the future momentum of the business. "Alcatel-Lucent's plan includes more of the same on restructuring, and not enough of the new focus," he said.

"This plan goes in the right direction, but I believe some elements of it are not aggressive enough," Bernstein Research analyst  Pierre Ferragu told Reuters. He said Alcatel-Lucent's cost savings targets should have been higher, given the tough landscape for vendors.

For more:
- see this release
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article

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