Alcatel-Lucent (ALU) has been one of the best performing stocks over the past month, and it has gained substantially. The networking equipment giant is making solid moves in the market and the turnaround is truly on. Alcatel-Lucent has been the best performing stock in the sector and has beaten its peers Cisco Systems (CSCO) and Juniper Networks (JNPR) by some distance. In my previous article, I talked about the positives to keep in mind while investing in ALU - and the investors who have kept faith in the management and the ability of the company are being rewarded handsomely.
Two-Pronged Strategy to Dominate again
The networking equipment industry is moving from hardware manufacturing to software-based technologies. Cisco Systems has been extremely active in the segment and the acquisitions in the segment have given it an advantage over its competitors. On the other hand, Alcatel-Lucent was facing a number of internal and external issues. In order to bring the company back to its previous heights, some drastic measures were needed. The management under the leadership of Michel Combes decided to adopt a two-pronged strategy: First, the company decided to move to the IP and ultra-high speed broadband services and the second part of the strategy was to reduce and refinance debt and bring down the costs in order to become profitable by 2015.
First of all let's look at the first part of the strategy - the customers are demanding ultra-high speed Internet (30Mbps, 100Mbps etc). At the moment, a very small number of broadband providers (only about 2%) are providing ultra-high speed broadband in Europe. There is a massive opportunity in the market. The Digital Agenda ( EU's strategy to facilitate digital technologies) for Europe set three major targets on broadband: basic broadband networks should be available to all EU citizens by 2013 and by 2020 half of European households should subscribe to at least 100 Mbps, while 30 Mbps should be available to all Europeans.
The 2013 target is mostly achieved, and now Digital Agenda has a clear focus on migration to faster speeds. So, Alcatel-Lucent has achieved impeccable timing in turning its focus to ultra-high speed Internet market. The EU believes that widespread use of high-speed Internet is crucial for economic and job creation, which should accelerate the deployment of ultra-high speed Internet in Europe.
Alcatel-Lucent has the edge over its competitors in the ultra-high speed broadband segment - the company successfully tested its new technology to enable the copper telecommunications networks to support ultra-high speed broadband. Alcatel-Lucent's Bell Labs have developed vectoring techniques, which allow the copper networks to support ultra-high speed broadband. As a result, the broadband providers will not have to invest in fiber-to-home products, which are some of the biggest investments. Furthermore, there will be no need to deploy new fiber optic lines, which will again result in substantial cost saving for broadband providers.
The second part of the strategy involves refinancing and a decrease of debt over the next two years - for this purpose, the company appointed Jean Raby as the chief financial officer. Specifically, Alcatel-Lucent wants to bring down its total debt by €2 billion ($2.67 billion) by 2015. Furthermore, the company is looking to bring down the interest cost by refinancing €2 billion ($2.67 billion) worth of debt in addition to € 1 billion ($1.34 billion) in selective asset sales. At the moment, Alcatel-Lucent pays 6.25% on its U.S. dollar denominated debt and 6.5% on its euro denominated debt - both of these interest rates are higher than the London Interbank offered rate.
I have been cautiously optimistic about the company in the past. However, the clearly defined goals and impressive early execution of the strategy has increased my optimism. Michel Combes has impressed so far in his new role and the turnaround seems to be gathering pace. However, there is still a lot that needs to be done and investors will have to be patient. In a recent interview, Michel Combes indicated that there will be further job cuts at ALU. I believe the combined cost reduction from job cuts and refinancing of the debt will be substantial. If the company is able to continue the smooth execution of the strategy then ALU investors will be the real winners in 2015.