Alcatel-Lucent CEO Michel Combes Introduces 'The Shift Plan' -- Company Repositioned with Focus on IP Networking and Ultra-broadband Access

Alcatel-Lucent CEO Michel Combes stepped into his new role in April. It took him about a month to publically preview of how he wanted to reposition the company in May. At that time, he promised the strategic review then under way would be concluded expeditiously and be followed with an action plan. He has made good on his promise with the public unveiling of what is being called, “The Shift Plan.”

The reason for the plan name is derived from Combes’ early stated belief that the best path for Alcatel-Lucent (ALU) to better financial footings and long-term sustainable growth would be to transform the company from its history as a telecommunications equipment generalist to an “industrial specialist.” The Shift Plan appears to be a reasonable roadmap to accomplish that objective.

The plan has several moving parts whose details can be found on the Alcatel-Lucent website. It is quite comprehensive in nature, touching concerns of the diverse ALU stakeholders and covers: becoming an IP networking and ultra-broadband specialist; focusing on customer needs for the deployment of next generation communications designed to enable it to target a wider range of customers beyond its traditional base of large telecommunications operators; acceleration of the retirement of legacy systems; articulation of a path to financial stability with stated goals; and a realignment of the management team organized around full profit-and-loss (P&L) and cash accountability.

The Shift Plan’s foundation is based on what is described as, “A clearly differentiated approach to the management of high-growth businesses – Core Networking – as opposed to those that will be managed with cash generation as the clear priority. The ‘managed for cash’ businesses will include key wireless, fixed access and other businesses that will play an important role in the Company’s medium and long-term development. Specifically, the Company expects that this will create enhanced opportunities for its LTE and ‘FTTx’ businesses.”

Key components of The Shift Plan

Here are the key parts of The Shift Plan. They include:

  • A refocusing of the Group’s R&D spending on IP networking and ultra-broadband access with an increased emphasis on co-development with major customers and partners, while at the same time significantly reducing spend on legacy technologies.
  • Euro 1 billion (about $1.3 billion) in targeted reductions in the group’s fixed cost structure concentrated on actions to reduce sales, general and administrative (SG&A) expenses, refocus R&D and improve operational efficiencies.
  • Selective asset sales intended to generate at least Euro 1 billion ($1.3 billion) over the period of the plan.
  • Aiming at reprofiling the group’s debt (about $2.6 billion) and, once the company has clearly demonstrated the successful execution of The Shift Plan, a future reduction in debt to guarantee over the long-term financial sustainability.

Commenting on The Shift Plan, Combes said, “Today we are taking comprehensive action to position Alcatel-Lucent at the heart of the digital ecosystem, a place from which we will be able properly to capitalize on our many strengths. The Shift Plan is fundamentally an industrial plan that also addresses the Group’s operational and financial challenges by putting in place a strong and fully accountable leadership team with clear goals and the appropriate levers to deliver on these goals and on our commitments to all stakeholders.”

Combes added, “With The Shift Plan, which is designed to be self-funding, we are aligning realistic and deliverable ambitions with our core competencies. Over the next three years we are targeting Euro 1 billion of fixed costs savings, and carefully defined and timed asset sales expected to generate at least an additional Euro 1 billion.”

It was also revealed that under The Shift Plan, Alcatel-Lucent is planning to grow its revenue in Core Networking by more than 15 percent, from Euro 6.1 billion (about $8.1 billion) in 2012 to over Euro 7 billion (about $9.2 billion) in 2015, while lifting its operating margins in this segment from 2.4 percent in 2012 to more than 12.5 percent in 2015. The company noted that the strategic focus on cash management in wireless, fixed access and other businesses – emphasizing investment in 4G LTE, vectoring and fiber-based access systems while significantly reducing R&D spending on legacy technologies – is expected to deliver positive segment operating cash flow of more than Euro 250 million (about $331 million) in 2015.

Combes concluded, “The Shift Plan redefines Alcatel-Lucent’s industrial identity and clarifies its role in the technology ecosystem. The goal is now set, and we can focus, with all the Alcatel-Lucent employees, on its delivery and on finally fulfilling the Company’s potential to create substantial and enduring industrial, social and financial value for all stakeholders.”

Reading between the lines

The group that may be the most important stakeholder being addressed by the plan, the financial community, has already cautiously endorsed the Combes’ plan as a “path to liquidity.” It believes the focus, belt-tightening, targeting of R&D etc., if executed as promised, will bear the results desired.

However, what was left unclear was the reference to the assets that would be jettisoned. Submarine, Strategic Industries and Enterprise units, all in the Focused Businesses segment of ALU, are the prime candidates. As mentioned, ALU says its goal is to raise more than $1.3 billion from asset sales over the next two years. Sales of these businesses would enable them to do so and help drastically reduce its debt.

The real questions given what is going on in the critical area of the cloud where software-defined networks (SDNs) in the enterprise and Network Functions Virtualization (NFV) on the service provider side of things are converging is whether the sale of the ALU Enterprise business would be cutting bone and not just flesh.

It can be argued that having intimacy with enterprise IT professionals is important to the service providers ALU is looking to bank its future on, and since cloud convergence is a major part of the puzzle, losing enterprise customer intimacy could complicate matters depending on who the sale of assets and subsequent relationships are executed. In addition, if in fact all three of the aforementioned units are sold in the next two years, while I am not a financial analyst, it seems that the valuations seem low. I would like to believe this is a case of setting expectations low.

There is an old saying that, “The devil is in the details.” This is an instance where enough of the details are known so that the devil is going to be in the execution. The good news is that this is not just a plan and a promise but is a plan with promise. It is a real shift and that is what everyone from investors to customers to industry observers was looking for and Combes delivered. How he delivers going forward is certainly going to make the next several quarters interesting to watch.

Edited by Rachel Ramsey
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