The networking industry is taking a new shape at the moment, and most of the companies operating in the industry are trying to reengineer themselves. Software defined networking technology (SDN) is the future, and this technology will most probably provide the future growth for networking companies. This technology, however, is in its infancy at the moment. SDN has the potential to transform the industry, and decrease the use of fixed locations and hardware. In my recent article about Cisco Systems (CSCO), I explained how the company is trying to exploit the high growth segment of the industry.
Recently, Alcatel-Lucent (ALU) has also decided to enter the segment after realizing the potential in the market. Alcatel-Lucent's problems are well documented and I have talked about its issues in detail here - however, this step should give its investors some encouragement.
Visualized Services Platform (VSP): How does it Work?
Visualized Services Platform is a technology suite designed by Alcatel-Lucent and launched through its subsidiary, Nuage Networks. The platform is targeted at the large enterprises and carriers. The system mixes the IT and networking knowledge of the company. VSP is based on ALU's service router operating system, and it uses distributed routing and switching to virtualize layers. VSG will help cloud vendors and service providers to efficiently manage their fast-paced network environment across multiple data centers.
VSP automatically creates connectivity by visualizing the network infrastructure. Nuage Networks has partnered with F5 Networks (FFIV), Palo Alto Networks (PANW), Citrix Systems (CTXS) and Hewlett-Packard (HPQ) for a range of parts for VSP. The company is planning to trial the technology in the coming months, and it will be available by the mid of current year.
Entering the software-based networking segment of the market might prove to be hugely beneficial for the troubled company. At the moment, this segment is the fastest growing, and margins are extremely high. The company has not announced any pricing policy; however, VSP is expected to be a high-end product. Alcatel-Lucent is in dire need of an increase in revenue and margins, and this lucrative segment will be an important contributor for the company.
Financial Troubles and Future Capital Needs
According to a recent Financial Times article, the company is looking to decrease the nominal value of its shares in order to achieve better financial flexibility. It is expected that the shareholders will be asked to support a decrease in nominal value from €2 ($2.56) to €0.05 ($0.06) in the next AGM. Alcatel-Lucent's financial troubles are well known, and it is clear that the company will not be able to raise funds through debt, if there is any need in the future. According to the article, it can be an effort by the management to clear the way for a future rights issue to raise capital.
There are mixed opinions about the option of a rights issue. Some experts believe the company might not be able to raise funds through a rights issue. On the other hand, some experts believe that if the intent of the issue is to pay down debts and an increase in capital expenditure, then the company might be able to raise the desired level of funds. I tend to agree with the latter, and believe that the company will be able to raise funds if it focuses on debt reduction and capital expenditures. Alcatel-Lucent has one of the best research and development teams, and its shareholders still have belief in the abilities of its research team. However, the R&D department will have to come up with something special to regain its position in the market.
Alcatel-Lucent competes mainly with Cisco Systems, Juniper Networks (JNPR), Nokia Siemens (NOK) and Ericsson (ERIC). Cisco is the most rapidly growing company in the sector, with a focus on software-based networking, and it is currently gobbling up most of the opportunities in the market. Juniper is also making forays in the segment, and an increase in the demand for data and data services have allowed the company to grow.
Nokia Siemens and Ericsson are two of the biggest competitors for Alcatel-Lucent in Europe. The competition is extremely tough in the traditional networking hardware segment. As a result, the company needs to focus more on the software-based services. The launch of VSP is a step in the right direction; however, the company needs to expand its product offering in order to truly capture the potential in the cloud market and software-based services segment.
There is not much good news for Alcatel-Lucent these days. The company faces a lot of challenges from inside as well as outside; in such times, the news of some growth opportunity is a welcome one for the company. We will also see a change in management as Michael Combes tries to implement his own policies. The risk-reward scenario for Alcatel-Lucent has not changed much - while the launch of a new system is encouraging, the troubles about the cash flows, liquidity, debt and restructuring are still present. The company might present an attractive opportunity to risk-savvy investors at current prices. However, I believe, low-risk tolerant investors should stay away from ALU and wait for more positive news.