Alcatel-Lucent (ALU), the French telecommunications and networking giant, has made solid progress recently with various cost cutting initiatives and asset sales. Alcatel is executing a turnaround under new CEO, Michel Combes, who has repositioned the company as a specialist in internet protocol, cloud networking, and ultra-broadband access to achieve profitability. These initiatives have helped Alcatel gain almost 200% in the last one year, and there's still room for improvement.
In fact, at present, Alcatel looks like a better buy than its rival Cisco (NASDAQ:CSCO), which is struggling after the NSA spying scandal. Going forward, I believe Alcatel would be able to deliver strong growth to investors as opposed to Cisco. Let's see why.
Alcatel's gross margin has been improving fast. In the previous quarter, its gross margin increased 400 basis points year over year. In addition, its decision to sell non-core assets has gone down very well with investors. For example, Alcatel recently announced that it has sold 85% of its enterprise business to a Chinese firm, China Huaxin, for $362.5 million. Such divestitures will improve Alcatel's cash position, enabling it to repay its debt and make investments to grow the business further.
Alcatel has taken many initiatives to reposition itself to attain profitability. The company has penned a strategic partnership with Qualcomm (NASDAQ:QCOM), enhancing its presence in IP Routing, WDM, Cloud, and Ultra-broadband, namely fiber and vectoring, for fixed lines and LTE. Alcatel has also put together teams with Qualcomm to work on small cells to deliver multi-standard products with Wi-Fi to customers that will be launched in the coming months.
With respect to IP platforms, Alcatel launched three new trials of cloud-band and virtualized applications in the fourth quarter that helped the company tap tier 1 service providers. Alcatel had successfully launched eight cloud-band and virtualized applications last year, thus broadening its virtualization portfolio that includes EPC and IMS, edge routing and core routing, and datacenters.
Alcatel has also taken strategic initiatives to rationalize its debt/equity mix. It has already sold LGS, a U.S. Federal Government subsidiary, and is also selling 85% of its enterprise business to China Huaxin. With a few more minor disposable assets, Alcatel can raise approximately $500 million that will help it reduce its debt. The company is also focusing on strategies for self-financing, and has therefore achieved a third of its 2-billion-euro target in fixed cost savings.
Moving with the times
Alcatel is also laser-focused on making its presence felt in network and cloud infrastructure. The company, with its R&D team, has observed that these two markets are intersecting at this stage, thereby giving rise to a vast opportunity.
As part of its turnaround strategy, Alcatel has taken strategic initiatives with respect to Ultra-Broadband Access, which is growing fast due to increased usage of smartphones, tablets, and other devices. This initiative will help Alcatel position itself to benefit from new opportunities.
Alcatel has also introduced new desk phones after finding that research conducted by its R&D team lead to a finding that 70% of the employees in mid-to-large enterprises (MLE) and small-to-medium enterprises (SME) still spend four to five days working from a desk, and thereby use traditional tools for communications.
Hence, the company has launched 8068, 8038, 8028 Desk Phones that offer rich IP communications and 8029, 8039 Desk Phones that offer rich digital communications. The modern designs of the new premium and digital desk phones provide high quality audio and practical features at a cost effective price. So, Alcatel is moving with the times and this should help it tap more growth.
This year, Alcatel also introduced Open Touch 2.0 with new communication capabilities that will help it keep pace with technology developments. This new device has many features such as open touch conversion for PC, open touch connections for desk-bound telephony users, open touch conversion for the web, and a new modern desk phone to increase real-time efficiency.
Alcatel has also launched Open Touch Personal Cloud (OTPC), a new application that will help individuals, employees, businesses, etc. exploit the cloud technology. Hence, Alcatel is making some really impressive moves to strengthen itself.
Gaining over Cisco
Alcatel is also being helped by Cisco's troubles. Cisco is finding it difficult to sell equipment in the emerging markets, while product transitions are opening up an opportunity for rivals like Alcatel to get in. Cisco is now focused on converting itself into a software and services provider. In the hardware segment, Cisco is looking to focus on datacenter equipment and security solutions. This move of Cisco's has opened up a massive opportunity for Alcatel to eat into Cisco's market share in the U.S.
Meanwhile, Cisco has also reduced its growth forecast for the next three to five years. It projects that its sales will grow 3%-6% over the coming three-to-five years as against the earlier expectation of 5%-7%. On the other hand, analysts expect Alcatel's earnings to grow at a whopping 82.7% annually over the next five years.
This shows that Cisco is facing difficulties as it transitions toward becoming a service provider from hardware. Cisco's latest routers have not performed well either, as competition from Alcatel has increased. Cisco's management admitted that the company was late in coming to the market with its latest routers, resulting in loss of market share.
Alcatel, with its turnaround strategies, looks very attractive. The company has already seen improvements in the gross and operating margins. Further, Alcatel can capitalize on new product launches in network and cloud infrastructure. Analysts also look upbeat about Alcatel's progress as we saw above. Moreover, given Cisco's frailties, I think Alcatel-Lucent is a better, and a more solid buy in this space.
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.