Turning around a large commercial enterprise is in many way akin to making a radical course change for an aircraft carrier—really sharp turns are ill-advised especially in turbulent seas, getting the ship balanced however for a major turn is critical, and being on the right new course as quickly as possible is typically something of urgency. However, as with large ocean-going vessels, steering the right course to one’s ultimate destination takes time and the need to make course corrections as changes dictate.
Alcatel-Lucent (News - Alert) (ALU) has been a big ship making a course correction via a major restructuring called “The Shift Plan,” instituted in mid-2013 by then new CEO Michel Combes, and as the just released Q1 2014 earnings indicate there is progress to report on the reorganization of the company into a more focused industrial one, and the company seems to have its bearings set for further progress.
Heading in a new direction
Below are selected highlights of the Q1 (which were at constant exchange rates and perimeter and treated the Enterprise unit as a discontinued operation in Q1 2014. Results at a high level included:
- Group revenues, excluding Managed Services, up 4 percent year-over-year
- Core Networking segment revenues up 7 percent, with strong contribution from IP Routing up 16 percent
- Gross margin improvement by 410 basis points year-over-year to 32.3 percent
- Fixed costs savings of Euro 143 million (US $104 million) n Q1 2014; bringing cumulative Euro 478 million (US $347 million) fixed cost savings under The Shift Plan when combined with Euro 335 million in 2013 (US $243 million)
- Adjusted operating income of Euro 33 million (US $24 million)
- Segment operating cash flow improved by Euro 220 million (US $160)
Commenting on the Q1 results, CEO Combes, said: “We began 2014 as we ended 2013 — totally focused on driving implementation of The Shift Plan. Having put the Group in the right financial direction last year we are encouraged by the continued progress shown in the first quarter of 2014. This confirms the industrial logic of the strategic choices we have made and provides a good start on which to build during the rest of 2014 as we work towards our objective of bringing the Group as a whole back to positive free cash flow by 2015.”
Geography and product mix matter
It is interesting to look at regional differences and the product mix to see how the ship is turning.
For example, from a geographic standpoint, North America was down 1.0 percent year-over-year, and down single digits which is less than the typical seasonality. ALU says this reflects solid spending in IP and wireless. While Western Europe was encouraging, the impact to get rid of poorly performing Managed Services contracts tempered the results. The rest of the world was mixed with Asia Pacific turning in almost 20 percent year-over-year growth because of activity in Japan and by network roll-outs in China. A double digit decline in CALA was partially offset by good traction in Middle East Africa (MEA).
On the product side of things where The Shift Plan really comes into play, again there is noticeable progress:
- Core Networking segment revenues were Euro 1,352 million (US $981 million) in Q1 2014, up 6.9 percent compared to Q1 2013.
- Adjusted operating income reached Euro 96 million (US $70 million), or 7.1 percent of the segment revenues in
- IP Transport reached Euro 454 million (US $330 million) in Q1 2014, up 8.6 percent year-on-year. Within IP Transport, terrestrial optics recorded its first quarter of year-over-year growth since 2011.
- IP Platforms revenues decreased by 6.9 percent year-on-year to Euro 349 million (US $253 million) in Q1 2014. Strong year-over-year growth in key platforms, namely IMS (VoLTE), SDM (Subscriber Data Management) and Customer Experience, was more than offset by declines in legacy platforms and by the impact from the portfolio rationalization done in 2013.
- Continued traction in Network Function Virtualization (NFV), a key development for the industry going forward, as evidenced by:
- Launch of the vIMS solution currently in trial mode with 8 customers;
- Global collaboration with Intel (News - Alert) to speed up the industry move to cloud and accelerate the development of our Virtualized Radio Access Network (vRAN) portfolio, our Cloudband platform, and High-performance Packet Processing for advanced IP/MPLS platforms and functions;
- Co-innovation agreement with Telefónica to drive innovation and adoption of NFV;
- Demonstration of virtualized RAN and EPC with China Mobile (News - Alert).
- Access segment revenues were Euro 1,572 million (US $1,141 million) in Q1 2014, a 4.2 percent decrease compared to Q1 2013. Excluding Managed Services, which decreased by half reflecting our strategy to terminate or restructure loss-making contracts, the Access segment grew 2.1 percent.
In short, putting aside regional challenges, ALU as characterized by CEO Combes, does appear to be directionally correct in terms of cutting its losses and focusing on the areas of the business where there are certainly growth opportunities. In fact, as recent news demonstrates independently operated Nuage Networks after only a year in existence, is laying a nice groundwork for growth in the explosive SDN/NFV market.
Finally, in news noted related to the earnings, CEO Combes in comments late last week did say in regards to the rumors of a possible Nokia takeover/merger that he wishes to go it alone. The results seem to indicate that despite the rumors there is no need to jump ship. In fact, it appears that “steady as she goes” is not a bad course to steer.
Edited by Maurice Nagle