Alcatel-Lucent (ALU) is one of the world's most innovative tech companies and is pioneering a faster more efficient internet called Ultra-Broadband Access. Based in Paris, France, the telecom company makes phone equipment and networking hardware. Although Alcatel-Lucent is over a century old, its current structure represents the merger with Lucent Technologies in 2006, which included legendary electronics research giant Bell Labs, the developer of transistors, the most important catalyst for the computer revolution.
Even though Alcatel-Lucent is nowhere near its $80 per share level of 2000, which fell below $20 the following year, it has made a turnaround in 2013 from $1.50 to $4. The Q3 earnings report was much better than analysts expected, sending the stock sharply upward. CEO Michel Combes, who took the position in 2013 after serving as CEO of Vodafone Europe the previous four years, has laid out a downsizing strategy and a focus on high speed broadband for providers. He will also need to trim the company's $1.5 billion debt and improve cash flow.
Despite the stock's phenomenal rebound, there are mixed opinions about it in the investment community. Debt to equity ratio is glaringly high and exceeds the industry average. The balance sheet of the past two years has not looked very glamorous due to declining earnings and net income, which in the third quarter of 2013 fell 123% from the previous Q3. The company's earnings have underperformed compared with its telecom peers as well as the S&P. Yet the stock jumped 16% following the release of the 2013 Q3 earnings report since revenue increased 7% from the same quarter the previous year to $5.05 billion.
But as unclear as the company's future may appear to pessimists, it's quite interesting how Combes has taken big steps to reshape the company. He plans on cutting 10,000 jobs by 2015, which will lower fixed costs by 15%. He has also addressed the company's short term cash problems by announcing Alcatel-Lucent will benefit from a new round of financing by selling $1.3 billion in new shares, introducing over 450 million new shares to the float. The company calls its strategy to focus on being a specialist IP Networking and Ultra-Broadband Access vendor "The Shift Plan."
The company will add more cash to its treasury by selling off its Digital Multimedia Solutions division to Nantworks for an undisclosed amount. The telco unit develops interactive media and helps businesses monetize internet businesses. With the spinoff, Alcatel-Lucent is clearly becoming a leaner company focused on cleaning up its balance sheet. In addition, the company is winning new partnerships with Qualcomm (NASDAQ:QCOM) and Sprint (NYSE:S) to accelerate the growth of Ultra-Broadband access internet. Combes intends to integrate this development with cloud services. Qualcomm is now considering investing up to 20 million shares in Alcatel-Lucent.
At least three of Alcatel-Lucent's infrastructure innovations stand to reshape the broadband industry in the coming years. Their optical fiber-based Ultra-Broadband and new wireless TDD-LTE Ultra-Broadband networks will keep them in the news for investors interested in cabling, RF design, IP Networking and systems integration for multiple quarters. China Mobile (NYSE:CHL) has also emerged as a supporter who will use TDD-LTE for its infrastructure.
Another development that the company has introduced is Ethernet Passive Optical Networking [EPON], which improves bandwidth and internet speeds. EPON is designed to be integrated with existing cable services. It's already been selected by one of the top commercial services networks in the US, Bright House Networks. EPON's wider bandwidth allows for up to 1G or 10G upload and download speeds and can support more customers per fiber than existing broadband solutions. In this century, technological innovation has proven to drive market value.
MIT Technology Review named Alcatel-Lucent one of the world's top 50 most innovative companies in 2012. The telecom manufacturer owns cloud facilities in both Silicon Valley and Israel. Its partnerships with Qualcomm and Sprint to build faster, more efficient high speed internet using a new optical fiber-based cable and wireless Ultra-Broadband position them to continue to be regarded as pioneers in the future of the telecom industry. Their role in improving internet for both large scale providers and consumers will keep them at the core of broadband's infrastructure development for years to come.
Although the balance sheet has looked questionable in recent years, new CEO Combes is making strategic moves to focus on the company's innovative strengths. The stock may not get to triple digits in the next decade, but double digits is a reasonable expectation. They will be a major player in improving the internet experience for gaming and video streaming, which are already two hot industries that aren't going away. While Alcatel-Lucent integrates its TDD-LTE mobile access network with the cloud, the stock also seems destined for cloud level performance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.