The new plan may sound like more of the same at Alcatel Lucent SA (ADR) (NYSE:ALU) since the last chief also had a restructuring plan. However, the execution of that plan was minimal and left much to be desired even as laid out on paper. Not enough jobs were cut and in my opinion, not enough parts of the company were on the chopping block. The company’s market cap is very little compared to its revenue, and I think those two numbers will need to meet somewhere around the middle.
Trimming more than fat
High up on the list of units that need to be jettisoned is the profitable submarine cable business. If you had the same history textbook as I did in high school, you saw the old engraving or woodcut of telegraph cables being placed in the ocean between the U.K. and the U.S. Cables are still the most superior form of data transmission, despite the leaps made in wireless. The breakthroughs made with cables are left out of the public consciousness, because they seem mundane. The cable business has low margins. Getting rid of low margin businesses is generally what you do to boost returns once you are turning a profit, but Alcatel-Lucent can use all the cash it can get.
Another piece of good news is that the head count is to be reduced further. Alcatel Lucent SA (ADR) (NYSE:ALU) has far too many people working for it considering the losses it has been posting. All this unit ejecting, head cutting, and expense chopping has some people concerned about Alcatel Lucent SA (ADR) (NYSE:ALU)’s ability to compete.
Expense cutting does not mean a lack of growth
Competition with the likes of Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR) requires money to be spent. Alcatel-Lucent is in a lot of businesses and not all of them deserve attention. The company needs to efficiently spend money, and it will likely increase spending where necessary to remain competitive in its core businesses or more importantly, the ones with the greatest potential.
The company did not bring its new core router to market just to have it become obsolete inside of a year. The company has at least indicated that it will be preparing for SDN like Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR). I do not think there is any benefit in painting the company as a fool. Winning market share, developing new products, and breaking into new markets takes far more time than Alcatel-Lucent has if it does not drastically cut expenses. In order to aggressively expand its business, it first needs to make money.
Alcatel Lucent SA (ADR) (NYSE:ALU), like most companies, has money pits throughout the company that yield no benefits in the long-term. If the company has to lose $4 billion in revenue in order to save $6 billion, that is a good deal. Also, if it divests assets then it will have cash. Not all of it needs to go toward paying off debt, and the company is raising even more money to keep debt at bay by issuing convertible bonds. Some cash can go towards staying competitive and technologically advanced.
Efficient use of capital is the key to growing while cutting expenses. Other companies manage to do it, though growth might stall a bit. I would be looking for certain parts of Alcatel Lucent SA (ADR) (NYSE:ALU) to continue doing well, and the others to be quietly dropped.
I used to think leveraging the patent portfolio was a great way for the company to generate cash, but I do not think that will be effective anymore. There are still some out there that feel the company is not doing enough with its portfolio. The framework Alcatel Lucent SA (ADR) (NYSE:ALU) set up meant that the patents would be available to a very small group of companies. I also do not want to see it wasting too much effort on the patents, because it is a short-term fix at best, and that effort is better spent finding places to save on recurring costs.
Competitors seek growth as well
Juniper Networks, Inc. (NYSE:JNPR) is having trouble growing. For context, Juniper has about one-fifth or one-fourth the revenue Alcatel-Lucent does. It is harder to grow a larger company than a smaller one. By revenue, Alcatel-Lucent is the larger company. If Juniper is having trouble growing, then it is a signal that the industry circumstances do not point to easy growth. Some of the issues might be Juniper’s, but some are definitely the industry. Juniper’s last earnings showed the company beat on EPS but come in about flat for revenue. That is not the sign the market wanted considering that 2013 was supposed to be a better year for networking than 2012.
Cisco Systems, Inc. (NASDAQ:CSCO) does a ton of different things, which helps explain how it managed to beat on revenue. However, the most recent earnings were the first time that the company really beat on the top line. It delivers better profits regularly, but rarely does it manage to bring in more money than expected. Cisco has been run well for the most part so it did not need to undergo a period of introspection to find out how to change itself to do better. Even then, the company aims to cut costs while networking remains soft. It has paid off really well.
Conclusion
Alcatel-Lucent is a telecom company first and a networking company second, while Cisco is networking first and telecom second. Alcatel-Lucent is looking to switch this focus. The companies tend to overlap a lot. If Cisco is using the weakness to cut expenses to capture profits when things start improving, then there is no reason Alcatel-Lucent shouldn’t do the same.
Alcatel-Lucent cannot outspend Cisco or Juniper. Cisco has too much cash, and Juniper has a better balance sheet it can leverage if it becomes a war of dollars. Alcatel-Lucent needs to win its internal conflict and make more money than it spends. It needs to spend money in the right places to keep a technological edge, but it cannot go overboard on marketing and global expansion. This restructuring is step one. I am liking my call options more and more.
The article Alcatel-Lucent’s New Chief Lays Out Restructuring Plan originally appeared on Fool.com is written by Nihar Patel.
Nihar Patel has the following options: Long Jan 2014 $2.5 Calls on Alcatel-Lucent (ADR) and Long Jan 2015 $3 Calls on Alcatel-Lucent (ADR). The Motley Fool recommends Cisco Systems (NASDAQ:CSCO). Nihar 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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