Alcatel-Lucent shifts and optical transport, FTTx shift with it

Alcatel-Lucent (Euronext Paris and NYSE: ALU) CEO Michel Combes today unveiled his vision for how he’ll reshape the company from what he called a "generalist" approach to the market to one that focuses on high-growth areas. The strategy, called "The Shift Plan," will see Alcatel-Lucent focus on IP networking and ultra-broadband access, shedding assets that fall outside these areas. Combes did not identify specific product and service lines that will be targeted for removal. However, initial indications were positive for the company's current optical-related business lines.

The Shift Plan will see the company's activities reorganized into three main areas:

  • Core Networking, which will include IP routing, IP transport (including both terrestrial and submarine optical transport), and IP platforms
  • Access, which will include wireless access, fixed access (including all FTTx activities), patent licensing, and managed services
  • Other, which includes the company’s enterprise and government businesses.

The Core Networking operation will be managed for growth. Combes said he expects revenues within this segment to growth from €6.1 billion in 2012 to €7 billion in 2015. Meanwhile, he said he wants to see the group's operating profit to grow from 2.4% in 2012 to more than 12.5% in 2015. To help achieve these targets, Combes says he plans to boost R&D spending by 8% while cutting SG&A costs by about 13%.

The other two segments will be managed for cash generation. LTE and FTTx will be areas of primary focus here. However, the company plans to take a hard look at its current managed services business. As a result, Combes expects operating cash flows in 2015 of €250 million, versus the negative €115 million from last year.

Overall, the company will embark on a strategic review of all its assets, with an eye toward selling those that don’t fit the new vision. Combes estimates the company will earn as much as 1 billion euros through such sales. Meanwhile, other cost-cutting measures – including reducing the number of markets in which it operates – should save an additional 1 billion euros. The company also plans to "reprofile" €2 billion of its existing debt, with another €2 billion reduction after the new strategy starts to show results.

"Today we are taking comprehensive action to position Alcatel-Lucent at the heart of the digital ecosystem, a place from which we will be able properly to capitalize on our many strengths. The Shift Plan is fundamentally an industrial plan that also addresses the Group's operational and financial challenges by putting in place a strong and fully accountable leadership team with clear goals and the appropriate levers to deliver on these goals and on our commitments to all stakeholders," Combes said via a press release. "With The Shift Plan, which is designed to be self-funding, we are aligning realistic and deliverable ambitions with our core competencies."

To execute this plan, Combes has reshuffled responsibilities among the leadership team. The new lineup includes:

  • Basil Alwan, IP Routing & IP Transport
  • Andrew Mcdonald, IP Platforms
  • David Geary, Wireless
  • Federico Guillen, Fixed Networks
  • Newly hired Philippe Guillemot, Operations
  • Philippe Keryer, Strategy & Innovation
  • Robert Vrij, Sales
  • Nicole Gionet, Human Resources
  • Tim Keller, Legal
  • Paul Tufano, CFO. Tufano will then surrender the CFO position once implementation of The Shift Plan has begun.

The plan received a positive review from Simon M. Leopold, communications equipment analyst and managing director at Raymond James. "Overall, we left the meeting encouraged and hold a favorable bias on our estimates and price target," he wrote in a note this morning. "The strategy makes sense with the dual focus including a profitable growth element based on Internet Protocol (IP) (including optical) and an element managed for cash based on access (fixed and wireless). Management expects 5% annual growth in Core Networks, including double-digit IP sales growth to €7 billion from €6.1 billion in 2012; it forecasts operating margin of 12.5%, up from 2.4% in 2012. Fewer targets were identified for the Access & Other unit, and we assume flat sales and breakeven operating margin. The forecasts implied that 2015 sales could near €15.3 billion, 5% above the €14.6 billion we model for 2014 with an operating margin near 6% vs. the 3% we model for 2014."

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