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Summary

  • The investment in EBlink will strengthen ALU's LTE portfolio, which is a high-growth segment.
  • The progress on the shift plan is on track and the company is on its way to improving its balance sheet and income statement.
  • The tender offer to purchase notes will allow the company to manage its debt profile and enhance its financial flexibility.

Alcatel-Lucent (NYSE:ALU) has been focusing on the high-speed internet and 4G-LTE segments, which has resulted in substantial growth in these segments for the company. Alcatel-Lucent's research and development team has always been top notch and the company has been trying to add to its intellectual property through different acquisitions, partnerships and investments. Recently, ALU has made an investment in EBlink (explained later), which will enhance its LTE portfolio. Furthermore, the progress on the "shift plan" is on track and the company is on its way to decreasing its operating expenses and improving its balance sheet. Let's look at the recent developments and the implications for the company.

Fronthaul Network: Well invested?

Recently, the company announced that it is investing in a French start-up company, which will enhance its LTE portfolio. In this partnership with EBlink, the company intends to convert its network to a framework called fronthaul, rather than using backhaul.

Image source: Link

In the image above, a simple demonstration is given as to how part of the networks are connected with each other. However, the usual thought process in telecommunications suggests that in a fronthaul framework, more fiber wire is needed to connect the base stations with the cell sites. EBlink, on the other hand, has more sophisticated equipment, which could transfer high rates of data over the wireless network without the use of fiber wire. Its current claim is that it can provide 7 Gbps over a wireless link by using a bandwidth of 100 MHz.

Besides being cost effective, fronthaul also complements growth. If an expansion plan is under way and fiber wire needs to be deployed, it will take more time to set up networks and overcoming any obstacles. There is also an issue of maintenance in fiber wire, and bad weather can easily disturb the wires, which may lead to more down time and high maintenance cost. In telecommunications, this down time can lead to customer dissatisfaction, which can result in loss of clientele.

With the EBlink fronthaul framework, the company has several advantages. First, it will save a significant amount of cost over fiber wire by using wireless equipment. Studies have shown that by using EBlink's wireless fronthaul framework, the company can save set-up cost up to 40%. Secondly, better connectivity will increase the demand for the company's equipment in the telecommunications industry. "FrontLink 58," EBlink is the only wireless fronthaul technology, available right now, which gives Alcatel-Lucent an edge over its competitors. In less than 75 MHz, FrontLink 58 can accommodate three LTE channels. The LTE market is growing very rapidly and this product complements the exact needs of it. Alcatel-Lucent has invested roughly $4 million in this project and we believe this investment will pay off well for the company over the next few years.

Qualcomm Partnership

Alcatel-Lucent is in partnership with Qualcomm (NASDAQ:QCOM) in order to build multimode cells, which would connect to the Alcatel-Lucent radio access network and small cell chips from Qualcomm. The transition of the telecommunications industry into small chips have increased the demand for these chips. With the combination of Alcatel-Lucent's radiolight, networks could be highly optimized. It will not only reduce Alcatel-Lucent's overhead but also increase its network speed. The multimode chips should hit the market soon as the companies had planned to market these chips by the mid of the current year.

The "Shift Plan" Update

Alcatel-Lucent launched its Shift restructuring plan almost a year ago in which it planned to dispose its unused assets. It recently reported that the company will meet its target of $1.36 billion from asset disposal. This increase in cash will provide the company with a better free cash flow, which can be used for investments similar to EBlink. Furthermore, the increased cash position will enhance the balance sheet of the company and make it a better prospect for long-term investors.

Tender to Buy Notes

Alcatel-Lucent announced the tender offer to purchase certain notes outstanding. The company will be purchasing notes worth about €424.7 million ($577.7 million). The purchase is being conducted by the company to manage the maturity of the debt - these notes currently yield about 8.5% and were going to mature in 2016. The company will pay 111.75% of the face value for the notes tendered along with the accrued interest. These notes will be cancelled and will not be reissued. Alcatel-Lucent has been proactive in managing its debt and the maturity profile in order to achieve better financial flexibility. By redeeming the notes with high interest rates, the company will be able to decrease its interest expense over the next few quarters.

Conclusion

Despite the recent fall in stock price, the performance of Alcatel-Lucent over the last twelve months has been impressive - the stock is up over 87% for the last twelve months. The growth opportunity in the 4G-LTE and high-speed broadband segments is substantial for the company. Furthermore, the operational changes in the company will continue to benefit the income statement of the company as the expenses will likely come down further. In addition, the sale of assets will result in enhanced balance sheet and increased cash reserves. We maintain that Alcatel-Lucent will continue its turnaround and it will be a good investment over the medium-long term.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Source: Alcatel-Lucent Making All The Right Decisions