I should have proof read the first posting but didn't, but, now that I have here is my final post in regard to the original post of "The New ALU" I revised the original post so it reads a little better. All comments or corrections are appreciated.
The New Alu in 2013 and 2014
A BILLION HERE A BILLION THERE
Now that $2.1 billion has been added to the balance sheet ALU’s restructuring plan will likely kick into high gear. The company has announced a plan calling for the potential sale of its submarine business unit, the reduction of 5,500 employees ( a significant number of which are French employees) and the elimination of 15 unprofitable service contracts (5 of which have now been eliminated).
DON’T BURN YOUR BRIDGES-- OR YOUR CASH
In 2012 ALU burned through nearly three quarters of a billion dollars, had a gross margin approximating 28% and net operating expenses of 28.5% of revenue. Right or wrong, during 2012 ALU didn’t burn any bridges to business opportunities. The company maintained all of its geographic markets and inked 74 major contract wins, all of which positions ALU for expanded revenue in 2013—especially China.
However, in 2013 it is likely ALU will reduce its geographic markets from 130 to 90 and its business units from 7 to 6. The estimated cost of such a restructuring should be approximately U.S $500 million. Factoring out restructuring expense of employee terminations, contract terminations and facility shutdowns in 2013 it is quite likely ALU’s gross margin at the end of 2013 will stand near 35% and net operating margin at 7%. Such a condition at the end of 2013 would make Alcatel-Lucent a “normal” company with profitable operations and positive cash flow in 2014.
A THING OF BEAUTY IS A JOY FOREVER
In a legal sense, corporations are people too. And as with people, it isn’t what is on the outside but what is on the inside that matters. To put it another way--It isn’t what is on the outside of a company (customer base, competition and macro-economic environment) but what is on the inside (dominate technology, high margin products and efficient operations) that makes for a thing of beauty. So what has ALU got to change on the inside in 2013 to become “a thing of beauty and a joy forever”?
Since 90% of Alcatel-Lucent’s revenues come from just 60 countries out of 130, it only makes sense to shut down operations in countries that have large overhead costs and insufficient revenue to support such operations. Under its current restructuring plan management’s intent in 2013 is for the company to down size or entirely eliminate its presence in countries where it is not operating profitably---and that includes Europe and in particular France where most of the reduction of 5,500 employees will take place in 2013.
WHYGROSS MARGINS ARE LIKELY TO IMPROVE AT EACH OF ALU’S 6 MAJOR DIVISIONS IN 2013
1. IP (i.e. routers) division should have an improved gross margin as a result of ramping 7950XRS sales
2. Optical (Terrestrial) division should have an improved gross margin as a result of the introduction of Capella’sWSS products
3. Optical (Submarine) division should have an improved gross margin due to recent new contracts
4. Wireline(i.e.PON/DSL) division should have an improved gross margin as a result of expanding VDSL2 sales
5. Network Applications division should have an improved margin due to expanded AT&T spend
6. Services division should have an improved gross margin as a result of the elimination of 15 unprofitable service contracts
As a result of the company’s restructuring plan, by year end 2013, ALU’s gross margin should be significantly better than the 27% the company achieved in Q3/2012. Even without the introduction of ALU’s new high margin products (LightRadio, WSS switches, VDSL2 products and its game changing 7950XRS core router) the company’s gross margin should approach 33% by Q4/2013. Looking at the success the company achieved with its edge routers and the expected hockey like revenue growth curves for ALU’s LightRadio, core router, VDSL2 and WSS products (all of which likely have gross margins north of 50%) it is reasonable to assume ALU’s gross margin will approach 35% in 2014.
Under the above scenerio and assuming total costs of the company remain at 28% of revenue, then, AT YEAR END 2013 ALU would be operating as a “normal company” with an expected profit of 40 cents per share in 2014!
DARE TO COMPARE
The above analysis suggests a potential 2013 price target of $2.50 to $4/share for ALU.
However, one has to consider how aggressive the percentage increases have to be in 2013 versus those of 2012 to become that “normal” company with earnings expectations of 40 cents per share in 2014. The following increases would be required:
1. IP (ie. routers) division’s 2012 gross margin of 49% expands to 51% due to 7950XRS sales.
2. Optical (Terrestrial) division’s 2012 gross margin of 17% expands to 22% due to WSS products and employee reductions.
3. Optical (Submarine) division’s 2012 gross margin of 29% expands to 31% due to recent new contracts.
4. Wireline (i.e. PON/DSL) division’s 2012 gross margin of 22% expands to 25% due to VDSL2 sales.
5. Network Applications division’s 2012 gross margin of 41 % expands to 43% due to increased telco spends ( in particular AT&T).
6. Services division’s 2012 gross margin of 22% should improve to 30% due to the elimination of fifteen non-profitable servicing contracts.
So all factors considered, a 7% profit on revenue of $13 to $14 billion in 2014 is entirely achievable and a corresponding rise in the price of the stock to $2.50 - $4 per share in 2013 is a reasonable target under such a scenario.
FROM MICRO TO MACRO
While ALU’s restructuring plan certainly has the potential to generate significant improvement in the company’s overall gross margin and significant reduction in its operating expenses on a micro level, the wild card is will the broader macro-economic environment co-operate enough for ALU’s restructuring labors to bear fruit?
There is no doubt ALU will see the benefits of the coming structured improvements in the company. However, some of ALU’s geographic markets will not be substantially better in 2013 than in 2012—namely Europe. The U.S. market was quite strong for ALU in 2012 and will remain so in 2013—in fact accelerating. Europe was quite weak in 2012 and will remain so in 2013. China was also weak for ALU in 2012 and at the moment could go one way or the other in 2013.
In addition, competition will remain intense in 2013. Hauwei and ZTE are formidable competitors and will remain so in 2013. Considering ALU’s balance sheet, size and current circumstances its best possible avenue to compete against these two government supported companies is with innovation, which is fortunately ALU’s strong suite and a major thrust of the company. To achieve its margin goals and compete in 2013 Alcatel-Lucent must be more agile, and faster in reacting to changing market conditions than it was in 2012.
YOU KNOW WHEN YOU KNOW
The United States knows it. Europe knows it. Australia knows it. Ericisson knows it. NSN knows it. And Alcatel-Lucent knows it. What they know is:
THE TELECOM MARKET IS IN TRANSITION AND MUST NOT BE CONCEEDED TO THE ASIAN MANUFACTURES AS WAS THE CASE WITH THE PC INDUSTRY
The market is in transition from voice to multi-use as is attested to by the increase in the use of video, the rise of Google, Facebook and others. To compete in the changing teleco environment a company must have the right technology, the right presentation platforms and the ability to service the customers that buy their products. Any company making the right choices in these three critical areas will flourish anywhere in the world. Judging from ALU’s product line-up the company is certainly at the technological forefront of the telecom industry. Its presentation platforms are second to none and it is one of the few global companies that can truly service all of a customer’s needs. Now that the company’s restructuring plan and its expanded credit line has addressed it balance sheet needs and gross margin weakness ALU is at the cusp of a major turnaround. 2013 is truly a tipping point for Alcatel-Lucent, a year that will prove either the soundness of its restructuring plan and create a company with expanding profitability for the foreseeable future or prove to be inadequate and submerge the company for the third and final time to join the ranks of companies like Eastman Kodak.
Hopefully, the current restructuring plan and loan package is what investors have “Ben VerWaayenting” for__especially those that invested “Ahead Of The Crowd”. ………..Tickerguy
M2M Communications Meets the Cloud ....via Techzine
alcatel mhealth m2m
Alcatel-Lucent Showcases Cloud-Based ng Connect Services Including MyMedicalRecords Telehealth Portal
alcatel m2m mobile wallet
[ In addition, competition will remain intense in 2013. Hauwei and ZTE are formidable competitors and will remain so in 2013. Considering ALU’s balance sheet, size and current circumstances its best possible avenue to compete against these two government supported companies is with innovation, which is fortunately ALU’s strong suite and a major thrust of the company
THE TELECOM MARKET IS IN TRANSITION AND MUST NOT BE CONCEEDED TO THE ASIAN MANUFACTURES AS WAS THE CASE WITH THE PC INDUSTRY ]
Think *SOFTWARE*.........Bell Labs has the stats / info going fwd.....about this industry...R & D....,RESEARCH comes b4 Developement.....Ben V said it...the highjer % of profits are in SOFTWARE.......if you have the research, why then just develop the hardware which can be easily copied....if you are in the Catbird Seat, develop (more) the software that utilizes the new hardware..,.ahead of the crowd...why lay cables under the ocean etc, when that focus / expendiiture could be going towards developing software to meet the demand that was the reason, based on your RESEARCH, you developed the hardware......cases in point LR & the XRS portfolios......the Nook, 1,000 devs needed....GE 400 "more" devs needed for their move into the "Smart Grid"......on and on and on........this is a/the work in progress at ALU, based on my DD.
A very broadstrokes post...
The cloud computing is a $180B industry by 2014 where Cisco, Alcatel, Juniper, HP, etc. are all fighting for their marker share which I predict only one or two will dominate in the end. I believe ALU will be the industry leader in this field where Bell Labs has been focusing on cloud network architecture for some time.
I’m also convinced that research papers (technical journals) from Bell Labs on Cloud Computing and Network/Security such as with V-IDS virtual-intrusion-detection-system and many others have been highly sought out by competitors such as Cisco and others, meaning even the competitors are depended on the scientists of Bell Labs Research and so does the US Government through Alcatel LGS Innovations.
ALU building its Cloud architecture organically from grounds up like with its OmniSwitch 10K’s implementation using existing IEEE standards like Edge Virtual Bridging VEPA 802.1Qbg EVB with ALU dynamic Virtual Network Profiles (vNP) for network virtualization specifically designed for deploying simplified, fully automated data center and cloud architecture over Shortest Path Bridging 802.1aq SPB-M with Multiple VLAN Registration Protocol (MVRP).
Cisco’s cloud technology solution is centered around buying up small cloud vendors like with its recent acquisition of “Meraki, a vendor of technology for cloud based management of wireless LAN, security appliances, and mobile devices for US$1.2 billion in cash and retention-based incentives”.
In terms of datacenter and carrier carbon footprint ALU network equipment such as XRS 7950, OmnisSwitch 10K, etc consume much less power than competitors. This is very similar to what is happening in the world of semiconductor where ARMH processors are overtaking Intel's because ARM uses less power, so would ALU become the industry preferred choice on Cloud Computing Network and router/switch deployments.
"... The cloud computing is a $180B industry by 2014 where Cisco, Alcatel, Juniper, HP, etc. are all fighting for their marker share which I predict only one or two will dominate in the end. I believe ALU will be the industry leader in this field where Bell Labs has been focusing on cloud network architecture for some time. ...."
Well, these days everyone provides cloud services - it's an airy hype term we should rather ignore if we truly want to know the potential of ALU to succeed.
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
Nice contribution Tickerguy! Congratulations!
LTE market shift
and the shake-up in the ro uting industry is surely on the cards. Alcatel’s core routers could address the growing demands on carriers’ core networks caused by an explosion of data traffic due to the proliferation of mobile devices and cloud computing solutions. The wireless industry is transitioning to higher speed 4G networks such as LTE and Alcatel the oportunity and could find a place for its core routers in these networks.
In fact, Alcatel has already scored a big win by lapping up Telefonica and Verizon as one of the first customers for its new core routers. Verizon was one of Juniper’s more important customers and accounted for almost 15% of its revenues. The carrier will be using now Alcatel’s core routers to power its new 4G LTE network. Alcatel’s ploy of delivering an end-to-end solution consisting of core as well as edge routers may help it wrest core router market share from Juniper as well, having already trumped in the edge router market.
Sentiment: Strong Buy