Concerning IP margins. There is a strong case to be made that CSCO and Juniper will reduce prices significantly to protect market share thereby reducing margins with the appearance of ALU as a player. So I kind of doubt we will see a 2% rise in margins for the entire IP business, since core router sales are new, and relatively minor as compared to the revenue generated by Edge routers. There is no way that margins are going to be so large, when based on relatively small sales as compared to edge routers, that it will move the overall margin up 2%. It is a matter of scale.
Concerning Optical (terrestrial) margins. Capella, the company that ALU bought is a very small company. According to a Light reading article:
"The vendor giant (ALU) isn't revealing any more than that, though, saying only that it was "a relatively small acquisition" and that news of the deal wasn't broadcast as the purchase price fell below (an unspecified) "threshold for public disclosure."
Now, I don't know what the "threshold for public disclosure" is, but is most certainly a low dollar figure. And once again, considering that Capella is very small, and is probably not even profitable, or perhaps only barely so, there is no way they could meaningfully impact either the revenue of ALU optics, or their downstream margins in the next year or two. A 5% jump? No way. I mean that is a massive move up, simply as a result of buying a very small firm.
Optical submarine margins. Here you might be right, as management said that the submarine cable business was seeing a boost in the order book. And it might even be more than you suggest. But it is not possible to know. And the sheer number of contracts, while a good sign, still might not result in that level of improvement. But it is possible.
Wireline margins. 3% seems like a pretty big jump. But I think it is possible. But wireline is one of those areas seeing a lot of competition from Huawei, who I believe, has its own low-cost version of VDSL. So a recovery in spending in wireline may not find ALU benefiting as much as you think...both in terms of revenue or margins. So this projection is kind of iffy.
Network apps (i assume you mean wireless) margins. This is definitely possible with the ATT bump in spending, which more than likely will be followed with Capex bumps by VZ and Sprint. A goodly amount of this will come from Light Radio, which should have robust margins, enough even at modest revenue to help wireless margins. The fact that the Chinese are locked out of the US is good.
Service margins. The company recently made mention that they had successfully renegotiated some service contracts (I think this is correct), and they are exiting those that providers will not renegotiate. The bottom line should be an improved level of profitability and margins. But 8% is a very big bump. Also consider that ALU may have had to pay penalties for contracts that they exit, based upon the existing contracts conditions.
So while I think you might be right in a couple areas, I would guess you are way off on the IP, optical terrestrial, and wireline margins. So this makes your overall #$%$ment very much in doubt.
The typical response when looking at a company like ALU is to #$%$ them in a vacuum. The fact is, a great deal of what will happen to ALU is solely dependent upon the macro economic environment (Europe just reported the worst unemployment rate yet), and what competitors...make that LOW COST COMPETITORS do, OVER WHICH THEY HAVE ZERO CONTROL. Competitors have the ability to take a hit on margins, in order to take or keep market share, which just piles on another layer of pain on ALU who will be in the midst of a restructuring that will almost certainly not be completed until the end of 2014...no matter the current plan....as that plan does not go far enough to close a revenue per employee gap of almost $20K.
The loan ALU has from Goldman will not be enough, and it will still not be enough if they are able to add on another $900M from the Submarine Cable unit. When companies as large as ALU undergo large scale restructuring, almost without fail they are in disarray during the process....which makes them very vulnerable to lost business or lost opportunity.
As a result we find hallmark names like Credit Suisse, Goldman, and Bernstein either ambivalent or ambivalent on ALU right now. To succeed, ALU needs laser like precision in the conduct of their restructuring....and good fortune.
Thank you for your well thought out reply to my "ALU 2013 & 2014.
In response to your view of:
"Now, I don't know what the "threshold for public disclosure" is, but is most certainly a low dollar figure. And once again, considering that Capella is very small, and is probably not even profitable, or perhaps only barely so, there is no way they could meaningfully impact either the revenue of ALU optics, or their downstream margins in the next year or two. A 5% jump? No way. I mean that is a massive move up, simply as a result of buying a very small firm."
I googled "Public disclosure threshold for acquisitions" and as best I could make out the requirement for mandatory public disclosure of an acquisition is when the acquired company represents 20% or more of the acquiring company's revenue. I do agree Capella is probably quite small. However, with ALU's worldwide footprint and product ramping capabilities, by the end of 2013 WSS could be a significant product line--but then again, perhaps not. The impact could be anywhere between significant and hardly noticeable.
Where I do see significant margin improvement in the division is in the reduction in employee headcount. I believe this particular division is a very bloated division and headcount reduction will have a significant impact on the division's gross margin by the end of 2013.
In reflection, I do agree a 5% increase in the "Optical (Terrestrial) division's gross margin is a very big stretch and tend to think the improvement will be around 2% plus or minus a little.
In closing, my original post represent my view of "ALU at the end of 2013" under perfect circumstances. No doubt, between now and the end of the year not everything will go perfect for ALU and the macro-economic environment will undoubtedly throw Alcatel-Lucent more than one lemon.
In that regard, I have a neighbor that always thinks the glass is half empty (as is the case with so many investors), while I on the other hand always think the glass is half full. So when a lemon event happens my neighbor says: "Go long lemons", while I say: "Lets invest in lemon aid stands "Ahead Of The Crowd". ..........Tickerguy