The telecom industry is one of the most promising in the market mainly due to the rapid growth in sales and usage of smart devices.
Network equipment providers such as Alcatel Lucent SA (ADR) (NYSE:ALU), Ericsson (ADR) (NASDAQ:ERIC) and Cisco Systems, Inc. (NASDAQ:CSCO) are bound to profit from this paradigm shift, along with the smartphone developers.
However in order to fully capitalize on the shift from feature phones and traditional mobile devices to smart devices, network equipment providers will need massive investment in research and development (R&D), as Internet access speed becomes a key factor for smartphones and tablets users.
Some of these companies’ balance sheets are in poor shape and cash flows are wanting. Alcatel Lucent SA (ADR) (NYSE:ALU)’s burgeoning debt of $8.67 billion and a debt to equity ratio of 228.23, is just but the tip of the iceberg, for the Paris-based company’s unimpressive fundamentals.
The shift plan
According to reports, Alcatel Lucent SA (ADR) (NYSE:ALU)’s new CEO, Michel Combes believes that he has found the solution to the company’s problems. Combes has come up with a strategy, which he referred to as “The Shift Plan” that is aimed to streamline the company’s operations by diverting attention from some of its multiple projects to a few key business units. According to the plan, Alcatel-Lucent will focus on cutting costs and sale of assets in a restructuring program slated for completion in 2015.
The new strategy turns certain key businesses in wireless, fixed access and other areas into cash cows, as the company seeks to generate income for investment in LTE technologies, Vectoring and FTTx (Fibre to the x). These technologies will help Alcatel Lucent SA (ADR) (NYSE:ALU) participate competitively in the networking business during the paradigm shift to smart devices.
According to the plan, the company expects 85% of its R&D expenses to be concentrated on developing these core units. This shift will also increase the core networking activities by more than 15% by 2015, while the company expects revenues to grow from EUR 6.1B in 2012 to about EUR 7B.
Consequently, the company expects to increase its operating margins from 2.4% to about 12.5% by 2015. Additionally, the cost cutting program is expected to save the company at least EUR 1 billion, while the sale of assets should generate a similar amount. The CEO expects to reduce the current debt by refinancing EUR 2 billion in the near term, and is optimistic that the company will be able to reduce the debt by a similar amount once the shift plan begins to pay-off.
The Shift Plan seems to solve some key problems for Alcatel Lucent SA (ADR) (NYSE:ALU) including cash problems and the reduction of debt. This should improve the company’s financial position going forward. On the other hand, the company’s idea to shift focus to core networking units aimed at participating competitively in the smart devices era will improve revenues, while the cost cutting measures should boost margins. Overall, this will result in self-sustainability and consequently growth prospects.
Cisco Systems, Inc. (NASDAQ:CSCO) is by far Alcatel-Lucent’s biggest rival, while Ericsson (ADR) (NASDAQ:ERIC) is still a constant threat as the companies continue to adapt to the rapid developments in smart devices. Growth in the usage of smart devices presents a huge opportunity with some of the rivals, with Ericsson predicting that mobile PCs, tablets and smartphones subscriptions with cellular connection could triple 2012’s subscriptions by 2018. According to its June 2013 report,Ericsson expects smartphone subscriptions to grow from about 1.2 billion in 2012 to about 4.5 billion by 2018.