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Telecom & Commerce Wireless Watch: ALU’s Shift Plan focuses on two key areas, but wireless challenges remain tough
Jun 20, 2013 – Rethink Research  

Google may believe everything should be “always in beta,” but Alcatel-Lucent’s CEO, Michel Combes, is determined to end “perpetual” restructuring and return the company to stability with one swipe of his sword (or, at least, a 2.5-year plan). He has presented his plan to turn around ALU’s fortunes over the next two years, with key financial objectives of restructuring around a limited number of businesses with growth and profitability; restoring free cashflow; and reducing debt by €2bn. That will involve €1bn of asset sales and a similar amount of other cost reductions. And ALU will narrow its R&D, product strategy and resources to focus on two main businesses - IP Networking for revenue growth and Ultra-broadband Access, whether wireless or wireline, for cash.  
In carrier IP, ALU is on something of a roll, but its challenges in the wireless broadband sector remain tough, something that denies it the option of being heavily mobile-focused like Nokia Siemens. Instead, it has to try to compete with Ericsson and Huawei across the IP board, an ambition in which its wireless strategy, despite the strong lightRadio platform, is the Achilles’ heel.  
Like predecessor Ben Verwaayen, Combes presented his turnaround plan for the ailing vendor with a measure of panache and vision, but its prosaic title, the ‘Shift Plan’, highlights how things have changed in the intervening five years. Verwaayen took over a company torn in two by a mishandled merger and believed that a grand vision was essential to sweeten the inevitable cutbacks and give the firm a sense of mission. He delivered a highly credible plan, but his cost-cutting measures proved too hesitant once global recession hit, especially in ALU’s core Eurozone territory. To make matters worse, key elements of the grand plan, including the genuinely radical lightRadio architecture, were often either ahead of their commercial time, or clumsily delivered. In the meantime, Ericsson and Huawei were stealing the firm’s bread and butter.  
“I could blame the world for our difficulties, but the truth is we’ve missed product launches and been in too many geographies and businesses,” Combes said.  
He takes the helm in a far better position than Verwaayen. He can build on many of the reorganizations and the product strategies of his predecessor, and his timing is likely to prove far better. The recession show signs of lifting over the next couple of years in key markets; and notions which were core to Verwaayen’s roadmap will move from blue-sky to mainstream during his tenure. For instance, the deconstructed RAN, epitomized by lightRadio’s cloud architecture and small cells, is starting to make a commercial, not just a slideware, impact. And perhaps most importantly, Verwaayen presided over an intense concentration on IP infrastructure, leading to ALU becoming a significant challenger to Cisco, Juniper and Huawei in the carrier router space.  
Some Verwaayen visions have proved less successful, notably the early focus on applications and APIs, and on trying to become the carriers’ friend in countering over-the-top challenges. But Combes takes over several assets, on which he is now determined to build. A braver set of cutbacks to refocus the business on its core strengths is long overdue, and the company can then hope to ride on improving economies and accelerating fiber and 4G broadband build-outs round the world. It will do this with a streamlined product set that focuses on a few core technologies and services.  
In this respect Combes is emulating Nokia Siemens (NSN), whose own program of reducing the firm to its core – in that case, nothing but ‘mobile broadband’ – is starting to yield results. ALU’s focus is different, though overlapping. It cannot narrow down on mobility, since its potential lies in crossing the fixed/mobile IP divide and supporting all kinds of platforms for the data explosion. It is weaker in mobile infrastructure, relative to its main rivals, than it is in the telco equipment market overall – there was intense speculation, at the time of Verwaayen’s original plan, that it might exit the mobile RAN altogether. That is no longer on the cards, but its most immediate growth potential certainly lies in backbone gear – core routers, edge routers, IPTV platforms, backhaul and so on. The RAN, despite the technical breakthroughs of lightRadio, remains a tough market and one where there is still a 2-3 year wait for mass adoption of new ideas like metrocells. Even then, ALU suffers from its relatively low incumbent presence in 3G, especially if the carriers move away from their multivendor network dreams and come to rely on their established suppliers for their future HetNets too. Even in the US, where ALU has won deals with most of the major LTE deployers, it has usually taken a junior role to Ericsson, whose purchase of many Nortel assets – neutralizing the advantage of a CDMA installed base, which Alcatel acquired with Lucent – has proved a masterstroke in north American 4G.  
In this context, the heavy focus in the Shift Plan on IP gear, and supporting the move to the super-high speed internet, is fully justified. The two new core businesses will be IP Networking (IP routing, IP transport, IP platforms and associated services); and Ultra-Broadband Access (wireless and fixed access). Both will continue to build on ALU’s strategy in recent years, of increasingly converging wireline and wireless activities as both center on IP. This allows it to be more cost efficient by combining R&D – drawing on the huge Bell Labs asset – and other resources.  
It also enables it to provide an end-to-end solution for all kinds of operators (mobile, fixed, IPTV and quad play), although this is a challenge in itself because of the huge range of elements involved. It will be hard for ALU to compete, for completeness of platform, with Huawei – already established across all kinds of IP network – and Ericsson, which has invested heavily in the non-mobile aspect too. That landscape prompted NSN, for instance, to concentrate only on its strengths in mobile, but that option was not realistic for ALU, so it was left striking a difficult balance between breadth and depth, given its more limited financial resources compared to its major rivals.  
The IP networking focus remains far broader than NSN’s, for instance. The current IP division is joined with businesses in optical transport, IMS, IP platforms such as VoLTE, the CloudBand cloud enablement system and associated OSS/BSS products such as the Motive customer experience management offering. One of the key questions will be whether ALU can plow sufficient resource and expertise in to each of these elements to compete effectively with the big two, and avoid being stuck with a ‘broad but shallow’ reputation.  
To avoid this, it will need to establish excellence in some key IP platforms – as it is doing visibly in carrier routers and emerging base stations – and seek partnerships to fill in gaps, particularly in network software. Another tactic is to encourage ‘in-house start-ups’ to deepen the offering, with current examples including CloudBand, which is spearheading the response to emerging demand for cloud networks and software defined networking; and Nuage Networks, also working on SDN.  
While the IP Networking business is charged with delivering nearly all the growth in the company over the coming few years, the Access division will be “managed for cash” and restructured to deliver cashflow and profit, but is not expected to increase sales. The Access unit will be slimmed down to reflect that changed remit. The main areas of emphasis will be access based on LTE, vectoring and PON fiber. There will be a defocus on customer premises equipment and 2G/3G, but associated professional services will be part of the offering. There will also be “significant reduction” in R&D spend on legacy technologies such as 2G/3G and PSTN. "Our intent is obviously to reduce significantly our spend in legacy technologies in order to fuel our development of these new technologies," Combes said on a conference call. "It is a clear strategic turning point for the company."  
In the RAN, ALU is making the best of a bad situation – its poor position in UMTS and the decline of CDMA – by focusing on pushing the new, flat all-IP 4G networks, based on emerging architectures like small cells and Cloud-RAN. It has strengths here, but there is still a long life left in 3G expansion, particularly HSPA+ in Europe and parts of Asia. ALU thus faces challenges in addressing multi-technology 3G/4G roll-outs and network modernization programs, and like Samsung and NEC, it has to take the gamble that its new platforms will be modern and advanced enough to tempt carriers away from their entrenched relationships with their UMTS providers.  
As Verwaayen found to his cost, having a clear product strategy will not be enough to save ALU – this must be accompanied by ruthless moves to restore the firm’s balance sheet, profits and cashflow. To this end, Combes said ALU will sell €1bn ($1.3bn) of assets and reduce costs by a further €1bn by the end of 2015, statements which sent the share price up as much as 7.4% on Wednesday. After two years, the company should have sliced out non-core or legacy operations; achieved positive free cashflow – the goal which most eluded Verwaayen; and will be focused only on the most profitable businesses, all of these centered on the high speed internet. Once the cash decline is reversed, the next objective is to cut ALU’s debt by €2bn, by selling shares and/or further divestments. To boost its finances in the short term, ALU will refinance around $2.68bn in debt to repay a loan it secured in January, and may also raise another $2.68bn in future to repay those debts, via asset sales or a rights issue.  
ALU expects its IP Networking business to have annual sales of more than $9.4bn and an operating margin of more than 12.5% in 2015, up from sales of $8.2bn and an operating margin of 2.4% in 2012. The company did not provide a forecast for other platforms such as wireless access.  
It aims to target a wider range of customers including over-the-top players and some verticals/enterprises. The cloud IP platforms will be necessary to web giants like Google and some large corporations, not just operators, said Combes, and he also singled out cablecos as a particularly strong target. The focus on the cloud will also enable it to serve tier two, three and four carriers rather than having a structure geared only to the largest clients – an echo of IP arch-rival Cisco, and perhaps a sign that ALU will invest in the kind of channel structure which powers that giant. The company plans to redesign its sales and marketing strategy to address smaller customers.  
Given that many of the methods and objectives echo those of Verwaayen, some analysts remain to be convinced that Combes will deliver more than his forerunner, despite his reputation, during his time at the helm of Vodafone Europe, as a strong reorganizer. Analysts George Notter and James Kisner of Jefferies wrote in a client note: “We’re reminded that Alcatel-Lucent has been a perpetual restructurer. It’s hard to really see why this latest restructuring will get executed according to plan and yield the benefits that have been outlined here.”  
Combes is also wielding the expected axe over senior management to stamp his mark on the firm and hire people he trusts to deliver his plans. In particular, CFO Paul Tufano, who was effectively in charge of Verwaayen’s last restructuring plan, announced last September, will step down. His role as ‘chief reorganizer’ will be taken by Philippe Guillemot, who has been hired as head of operations, bringing experience from Europcar, Michelin and Valeo. In September, Tufano added the new role of COO to his CFO position and took charge of global supply chain and procurement as well as the company’s enterprise, strategic industries and submarine businesses. He was seen as a strongly operational executive to balance Verwaayen’s more visionary approach, but was too close to the former chief – and perhaps had hopes of the top job himself – to remain as Combes’ right-hand man.  
The company has not yet detailed the number of job cuts involved in its new plan, nor assets that may be sold (the submarine networks unit, long tipped for sell-off, is for now listed as part of the optical unit with IP Networks). Legacy technology areas, by ALU’s definition, now include 2G/3G, PSTN and SDH/Sonet and among the likely asset sales will be the mobile commerce and ‘applications enablement’ activities. ALU has also been trying to sell its enterprise division. Combes said: "I won't be providing a list of assets to be sold … I wish to retain flexibility." All well and good, but this is a time for decisive action and tough decisions, rather than endlessly keeping options open. NSN recognized that and is slowly reaping the rewards. Combes has set a timescale of 2.5 years to deliver on his promises, in reality a short period of time despite some prevailing fair winds in the economy and the carrier markets. The end of 2015 is likely to be a happy choice of timing, with major uptick expected in operator investments during that year, but there is still a tough first year in which Combes needs to maintain confidence while ALU lumbers towards its goals. Some further details and some swift action on the reorganization front will help build that credibility. 

Courtesy Rethink Research

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