Along with these two challenges, Alcatel Lucent is facing another big threat: Cisco Systems, Inc. (NASDAQ:CSCO). The John Chambers-led company is undergoing a massive transition with a focus on intelligent networks and technology. Cisco Systems, Inc. (NASDAQ:CSCO) is moving towards flexible, programmable and virtual networks. Despite the transition and uncertain macroeconomic conditions, Cisco’s earnings rose at twice the pace of revenue growth in FY12.
Cisco recently launched the CRS-X 400 core router that will allow customers to improve their routing systems and scale network capacity. Internet traffic growth, separate IP and optical networks and limited scale have been a headache for customers, and they have gotten an excellent solution in the CRS-X 400. This product boosts port densities by a factor of three compared to its nearest competitors, and lowers power consumption.
What should Alcatel Lucent do?
Along with slashing headcount, Michel Combes has to sell businesses that have become a burden on the company, like the optics and wireless divisions.
In my view, IP networking is the only unit adding value. Alcatel-Lucent expects the division to generate $9.4 billion in annual revenues with over 12.5% operating margin in 2015. The operating margin part seems pretty ambitious given just 2.4% operating margin in 2012.
I agree with Exane BNP Paribas analyst Alexander Peterc, that the company should exit its submarine optical cable business, which owns the undersea intercontinental trunk lines. Alcatel Lucent has also indicated in the past that it might sell its enterprise business. Selling these two businesses should fetch the bulk of the 1 billion euros that Combes plans to raise through asset sales by 2015. That will buy some time to bring the company back around.
Alcatel Lucent still has a lot of growth opportunities to make a comeback. It has a room for growth in Network Function Visualizations (NFV) and Software Designed Network (SDN). I think Combes should focus on cloud computing, and develop a service architecture that will support future cloud applications as well as future network services. He is blessed with one of the most brilliant R&D teams; he should exploit the opportunity to create compelling products and systems.
Bottom line
Michel Combes’ turnaround plan may be a little late as the company has already lost a major chunk of its market share to competitors. But the man has capabilities, and his plans are likely to generate extra value for Alcatel Lucent. A turnaround is possible only through slashing the workforce, intensive cost cutting and emphasis on new technologies.
However, given the fierce competition and macroeconomic uncertainty, investors should wait to see how the new CEO’s cost cutting plan goes before jumping in. I expect a positive trend.
The article Alcatel Lucent Revival Plan: Should You Jump In? originally appeared on Fool.com.
Vikas Shukla has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Vikas is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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