It is nice to see that Alcatel-Lucent (ALU) is making some headway with lightRadio. This is the product I think will save it from oblivion. That might be a bit dramatic, but Alcatel-Lucent cannot continue on its current course. It needs to start digging itself out of the hole it's in. A recent development that offers hope is Sprint (S) going with lightRadio as their small cell solution. I feel this is a beneficial deal for both companies. A less recent development is Alcatel-Lucent winning the business of Verizon (VZ) for core routers from Cisco (CSCO), which comes on top of its edge router success. I think it is beneficial to consider these items more in depth.
LightRadio Needs to Be Very Profitable
I hope that Alcatel-Lucent did not pay through the nose to get the Sprint deal or any other deals. The last thing it needs is to sell lightRadio at a heavily discounted rate. My core concern is the margins for lightRadio. CDMA is a very high margin business for Alcatel-Lucent, but it is fading. If it cannot be replaced with a similar high margin product line, or a product line with so much gross revenue that profit margins stay the same, Alcatel-Lucent will be in even more dire straits.
I hold the position that rarely do new technologies start out as high margin. This comes over time by way of expertise and scale. I hope the lightRadio cube itself has a fantastic margin, because they will have to be deployed en masse. It's OK if they are low cost as long as they are high margin, because I expect them to be high volume. It will be the other equipment to run the whole lightRadio ecosystem, and service contracts that will be Alcatel-Lucent's bread and butter.
I have written about Alcatel-Lucent and lightRadio before, which you can read here. I have not learned much more about lightRadio and its features since I wrote that article. Also, you can watch this video, showing a demo of lightRadio in 2011 when it made some waves at the Mobile World Congress.
Alcatel-Lucent: A Deal for the Better
Sprint has decided to go with lightRadio. It makes sense for Sprint to use the small cells in very dense areas. Right now it is focusing on busy, high traffic areas such as campuses and stadiums. I think lightRadio has potential on a broader scale, but it is good to get started somewhere. This choice makes sense for Sprint. LightRadio cubes should make the best use of their spectrum. Spectrum is extremely expensive, and minimizing how much is needed is a big benefit for a carrier.
Right now, small cells are seen as a way to fill coverage gaps from the bigger cell towers. I see small cells as having a wider scope eventually. This is not limited to just lightRadio. Big cell towers have their issues, such as being ugly and costing money to lease space. In dense urban areas, carriers need to set up lots of towers, but they can interfere with one another. Carriers then choose to go with more spectrum. The gap coverage will be big initially, but I think it can go bigger and be more widespread. Alcatel-Lucent needs to do all it can to be on the forefront of small cells. It does have a time edge on some competitors, though. That article also mentions some other agreements and trials Alcatel-Lucent has going on, such as the Telefonica trial.
I am glad it is Alcatel-Lucent that won Sprint's small cell business. It was expected, as I saw news as old as last year that Sprint was considering it, but that could mean lots of things. I think this deal between Alcatel-Lucent and Sprint will be a lucrative one. Hopefully, it leads to more business in the United States for Alcatel-Lucent.
This is not the only agreement Alcatel-Lucent has with Sprint. It is nice to see Alcatel-Lucent getting the agreements. Revenues need to increase. More than that, though, Alcatel-Lucent has to shed weight by shutting down unprofitable units, and cut back on staff. Management discussed cutting 5,000 jobs during the last earnings conference call. Letting people go is always hard, but it is better than the whole company going bankrupt.
Sprint: A Deal for the Better
One should not forget that from Sprint's perspective small cells will lower infrastructure costs. Considering the importance of coverage in marketing, filling gaps would be expensive without small cells. Keeping expenses low is very important for Sprint. Sprint solved some of its liquidity issues, but it does not have money to spare. It needs to stretch every dollar as far as it can, because that is what it needs to catch up to its rivals.
There is no word about whether Sprint has opted to go for the Wi-Fi version of lightRadio, but hopefully Wi-Fi is the next step for Sprint. The reason for this is that it would allow Sprint to continue offering unlimited data plans without seeing as severe of a slowdown for users. I am not sure why Sprint would not go with the Wi-Fi variant, but no details have been released regarding what specific product from the lightRadio portfolio is being used. I see Wi-Fi as critical for carriers to have high speeds, low data charges, and no data caps. Unlimited data will most likely be the future. Unlimited plans were the beginning, but technological and economic limitations caused limited data plans.
Network Vision requires major capital; I was waiting for Sprint's small cell news. Sprint needed it to keep expenses low while gaining the most ground. If the really high density areas get good and fast service, then Sprint can start boasting of a fantastic network. Speaking of high density areas, I hope that small cells blanket San Francisco near where I live. Every carrier has terrible service in many parts of San Francisco. That is just a bit of my personal, boots-on-the-ground experience. I will be carefully looking at Sprint's next two earnings reports and conference calls to see what impact, if any, going with lightRadio small cells will have.
Alcatel-Lucent Strikes Bronze in the Router Market
Alcatel-Lucent winning Verizon as a customer for their core routers is old news, around May 2012. It went unnoticed, though. For my last article on Alcatel-Lucent, I looked at tons of articles and still missed this news, which is why I am glad there is a good article on SeekingAlpha that discusses it. Verizon is the first customer for the new core router system.
I do not even recall this being discussed to much on the conference call, probably because it does not have an impact on earnings until it is deployed and shipped. More focus was put on the edge routers, which Verizon also uses. The article mentions that the products unveiling was accompanied by the Verizon announcement. I expect it will take a few quarters for a ramp in shipments and revenue to develop. Not sure how much revenue to expect at this point, but I will eagerly await future earnings reports.
The impressive thing about this core router is that it is capable of handling 400Gbps with a four port configuration. I do not want to delve too much into the specifications of the technology until I do more research. My takeaway at this stage is what the CEO said during the last earnings call. Alcatel-Lucent seeks to become a leader in innovation.
Alcatel-Lucent won Verizon away from Cisco. I see this as more of a symbolic victory. It does not mean you should sell Cisco to buy Alcatel-Lucent. Cisco is in much better shape than Alcatel-Lucent. However, it is nice to see Alcatel-Lucent winning large customers from a large rival.
The importance to Alcatel-Lucent is the revenue it will bring in. The core router business for it is a new market. It used to be in this market a decade ago, but this is the first foray in recent times. The revenue generated is not going to replace an older product's revenue stream. It is a brand new stream and expands the revenue pie by sticking in another slice. If they can keep margins positive and high, then this should increase overall revenues as well as offering more avenues for revenue growth. In my mind, this is very critical. Revenue growth with good margin means more cash in the bank for Alcatel-Lucent. The company badly needs to generate positive cash flow from operations in order to stay viable.
I would take a cautiously long position on Alcatel-Lucent, not betting the house as this is still a risky play. The trade analysis is unchanged from my article linked above because the price has not really changed. I still think Alcatel-Lucent has potential. I have a small position already, and might look to expand that now that I think we've hit a somewhat solid bottom. Still not going in deep, because we could dip down with more European gloom.
I think small cells are a good move for Sprint, especially if they help keep costs under control. I still like the Sprint LEAPS and recent declines have created better entries. I think Sprint is doing a really great job, and I might go with the January 2013 calls at a strike of $6 now. February 2013s are also available, and $6 looks good there too. My hope is that Sprint is busy consolidating its recent run, and it will continue up later.
If you are uneasy, then keep position sizes small. It might be prudent to wait and see what September is like. September can be a rough month, and if Sprint declines further I might go for $5.50 calls instead. The reason is not that I think Sprint won't do as well as earlier, but because it increases my potential gains. If I can make money with $6 calls, I can make more money with $5.50 calls if they end up just as cheap. All this with the same investment thesis.
Disclaimer: Do your own research, and do not rely on what I say without checking the facts for yourself. I am not a registered investment adviser.
Disclosure: I am long ALU. I have no open Sprint positions currently, and might hold off until I see what September brings.