Editor’s note: Alcatel-Lucent, which has an outpost in Raleigh, posted improved results in 1Q15, but underlying financial problems highlight the need to merge with Nokia, writes analyst Michael Soper of Technology Business Research.
HAMPTON, N.H. – Alcatel-Lucent’s finances — including margins and revenues — continue to improve, but its cash flow remains deeply negative due to restructuring and interest payments, among other factors. The company remains focused on becoming cash positive in 2015 and will accelerate fixed cost-reduction activities in 2H15 to achieve its goal. Alcatel-Lucent is reinvesting much of its fixed cost savings into R&D to continue innovating in key initiatives such as CloudBand and NFV/SDN.
Alcatel-Lucent is executing its growth strategy around core routing, small cells and fiber optics, which are growing faster than the broader telecom market, but the company remains overly dependent on the U.S. market, where operator investment is slowing. Alcatel-Lucent’s U.S. sales grew 6.8% year-to-year due to currency effects.
Alcatel-Lucent’s new Bell Labs Consulting unit will compete with the consulting arms of its biggest competitors
Alcatel-Lucent is working to better monetize the engineering talent in its Bell Labs research department. Bell Labs is staffed with thousands of engineers and holds tens of thousands of patents that Alcatel-Lucent has struggled to monetize over the last several years. The company views the shifting networking market as an opportunity to leverage the technical expertise within Bell Labs to launch a new consulting practice.
Bell Labs Consulting pairs engineering and analytical personnel to provide consulting in areas such as SDN, NFV, cloud, wireless, fixed access, optical networking and IP routing for service provider and large enterprise customers. Alcatel-Lucent appointed Cassidy Shield, who previously led marketing for Alcatel-Lucent’s software business, as managing partner of Bell Labs Consulting.
Bell Labs Consulting is targeting opportunities with telecom operators and in enterprise verticals such as defense, utility and railway. The division consists of 140 consultants providing services around innovation strategy, transformation, M&A and competition. While Bell Labs has been providing these services for at least three years, Alcatel-Lucent will scale the business in 2015. Bell Labs Consulting is a relatively small operation at this point, but with additional investment it will become competitive with Ericsson, Cisco’s Advanced Services and IBM.
Acquisition by Nokia represents the best-case scenario for Alcatel-Lucent
In April Nokia announced it will acquire Alcatel-Lucent in an all-stock transaction valuing its France-based rival at €15.6 billion (or $16.6 billion). The transaction is expected to close in 1H16, provided it passes regulatory scrutiny. TBR believes Alcatel-Lucent CEO Michel Combes engineered an excellent exit strategy for his company, finally making the combination feasible after years of speculation. Despite years of restructuring, the company’s long-term survival remained in question.
The combination with Nokia will give the company the scale needed to better compete with Ericsson and Huawei. Combes restructured the company’s debt portfolio, pared down product and service portfolios, exited or divested noncore businesses such as Alcatel-Lucent Enterprise and LGS, and trimmed headcount to 52,673 as of the end of 2014 (down from about 64,800 employees in June 2013 when the Shift Plan was implemented). Alcatel-Lucent will continue executing the Shift Plan until the acquisition closes.