The networking equipment industry has experienced sluggish growth over the past three years. However, more recently, the growth in the sector has picked up due to the introduction of software-based networking solutions as well as an increase in demand for networking equipment. As a result, we have seen substantial rise in the stock price of networking equipment manufacturers. Alcatel-Lucent (ALU) has been the biggest gainer over the past twelve months - the stock has gained about 72%.
Reasons For Optimism
The company suffered due to not adapting to new technology and not changing its product portfolio accordingly. However it has learned from its mistakes, as the management has embarked upon "A Shift Plan," and is expected to spend around €1.2 billion ($1.61 billion) on restructuring by 2015.
The plan appears to have worked, as the business reported year-over-year increase of 1.9% in its recent earnings announcement; IP and the Network segments were the growth drivers experiencing an increase of 25% and 8%, respectively. However, optics segment still experienced losses. Analysts are optimistic about the new Alcatel-Lucent, and Morgan Stanley is predicting positive cash flows by 2015.
The premise behind this optimism is its future prospects. The company has collaborated with Qualcomm Technologies, a subsidiary of Qualcomm Inc (QCOM), to improve wireless connectivity via small cell base stations. The collaboration will immediately boost its position in the industry. At the moment, the equipment manufacturers are focusing on broadband and wireless technologies as these are the most lucrative segments of the market. Alcatel-Lucent's collaboration will allow the company to better exploit the opportunity available in the sector.
Michel Combes plans to gear the business model towards growth, and the company is spending a significant amount on R&D (about 16% of the total sales). Alcatel-Lucent is among the top three companies in the optical segment, along with ZTE and Huawei. The company intends to double its optical and routing investment in order to support its shift plan and capture larger market share in the IP networking and ultra-broadband access segments. As a result, further good news can be expected from Alcatel-Lucent. Furthermore, institutional interest is increasing in Alcatel-Lucent; a number of hedge funds are optimistic about the company, and these hedge funds are adding to the positions. There are a lot of positives for the company that indicate that the company is moving in the right direction.
What are the Other Players Doing?
Cisco Systems (CSCO) is undoubtedly the leading player in the networking equipment sector. The company has captured a substantial portion of the lucrative cloud computing segment. As the company takes a more software centric approach to its business model, switching and routing still contribute to the majority of its revenues. The company has performed well with a sustainable increase in its revenues. The strategy employed is more acquisition, driven with Cariden, Meraki and Cloupia amongst its recent takeovers. The aforementioned acquisitions have enabled the company to establish a more sophisticated Wi-fi network. Cisco has always taken a proactive approach in this period of transition. Its collaboration with Continental vehicle manufacturers to provide networking technology authenticates its position as an industry leader. Furthermore its recent collaboration with Los Pelambres Mining (MLP) ensures a well diversified portfolio.
The discussion would not be complete without the mention of Juniper (JNPR) as a hardcore competitor. The second quarter revenues experienced a boost of 9%, brought about by an increase in product as well as service segment. Recent development for Juniper includes its launch of Juniper Partner Advantage Services to deliver improved revenues. In the networking segment, the company plans to use QFabric data to power its NICT run simulators to ensure quality and efficiency. Lastly, its presence in the Indian market will definitely broaden its future prospects.
When Michel Combes took over, the biggest challenge for him was to eliminate structural inefficiencies in the company. In my opinion, Combes is winning the first challenge, and I expect the inefficiencies to come down. Furthermore, Shift plan will have a two-pronged effect on the company. First of all it indicates that the company has identified the growth areas and the focus has been turned towards growth.
In order to achieve this growth, the company needs to have a clear plan - this is where the internal affect of the strategy takes place. It is imperative for the mind-set to change for the shift plan. The company is now working on a completely different direction, and employees need to learn new techniques. At the moment, the plan seems to be working, and the employees are responding well to the new strategies. If the company is able to continue the execution of the plan, then Alcatel-Lucent will soon regain its spot in the networking industry.