Editor’s note: Alcatel-Lucent’s restructuring lead to tangible improvements in cash flow and margins in 2Q15 despite weak spending by service providers, says Technology Business Research analyst Michael Soper. Alcatel-Lucent maintains an operation in Raleigh.

HAMPTON, N.H. – While currency effects obscured weak revenue, Alcatel-Lucent delivered improved gross and operating margin and cash flow in its 2Q15 results, driven by the “Shift Plan” restructuring.

A strong U.S. dollar bolstered revenue growth in 2Q15, but underlying factors, including a lumpy payment cycle in China and lower spending by AT&T and Sprint in the U.S., drove down revenue at constant currency rates. However, the company notched its first 2Q of free cash flow since Alcatel and Lucent merged in 2006.

As the Shift Plan winds down and the company inches closer to its combination with Nokia, Alcatel-Lucent will focus on executing its final fixed-cost-savings measures and alleviating pension obligations through a one-time lump-sum offering to 86,000 pensioners in the U.S. Nokia will acquire a much leaner and financially flexible company when the transaction is completed in 1H16.

Alcatel-Lucent combines Bell Labs’ expertise, Motive assurance, Nuage, CloudBand and VNFs for a leading NFV/SDN proposition

Alcatel-Lucent is one of the most advanced suppliers in NFV and SDN, offering a hybrid physical and virtual network solution that is both broad and deep. Breadth is provided by a common service model, called Service United Resource Engine (SURE) that builds a service topology from components across network resources.

The SURE solution leverages Alcatel-Lucent’s previous service assurance and fulfillment portfolios and CloudBand to provide orchestration and life cycle management. Depth is provided by Alcatel-Lucent virtual network functions (VNFs) and a complete SDN environment from the company’s Nuage Networks subsidiary, which focuses on SDN for large enterprises and service providers. Alcatel-Lucent’s robust solution, which includes automation supported by predictive analytics, provides a leading implementation for the software-mediated network.

However, Alcatel-Lucent’s early market position and strength of solution aside, the company is still seeking significant commercial volume beyond proof of concepts, with only four contracts for field trials so far. Additionally, the company’s solution lacks the billing system element and strong systems integration capabilities of a similar solution from Ericsson.

Alcatel-Lucent’s IP Routing business faces threat of longer upgrade cycle and SDN

TBR expects Alcatel-Lucent’s IP Routing segment to experience revenue growth in 2H15 on the strength of new contracts in China, but the unit faces headwinds starting in 2016 including a tapering off of upgrade projects, longer upgrade cycles, and the introduction of SDN into operator networks, which will impact hardware pricing.

While Chinese operators are in the midst of a massive routing deployment, Alcatel-Lucent’s other core customers in the U.S. and Europe completed several large projects within the past three years. Additionally, improved technology in the last investment cycle will result in fewer upgrades as existing equipment is highly flexible and can handle greater workloads.

The SDN threat is less immediate, but while Alcatel-Lucent is a leader in the space, it will not be able to overcome lower aggregate spend on routing hardware.

(C) TBR