One side effect of Alcatel-Lucent (NYSE: ALU) getting that $2.1 billion credit facility Friday is that the world got to study the financials of AlcaLu's separate segments.
You can find the PDF presentations on AlcaLu's website. And they contain a couple of interesting details.
Specifically: "We didn't realize that Alcatel-Lucent's [optical] margins were this bad," writes analyst George Notter of Jefferies & Company Inc. , in a note issued Monday morning.
It's no shock that the optical business's margins are lower than those of, say, the IP business.
But AlcaLu's gross margins of 17 percent for terrestrial optics and 29 percent for submarine optics are what caught Notter's eye. Infinera Corp. (Nasdaq: INFN) and Ciena Corp. (Nasdaq: CIEN) made gross margins of 39 percent and 42.7 percent, respectively, in their most recent earnings reports, and neither one was profitable.
"We’re therefore assuming that Alcatel-Lucent’s Optical division is operating at deeply negative profit margins," Notter writes.
I suppose it's possible, although I'm not sure they would do that. I could certainly believe some kind of bundling is happening. Anybody out there have a good view of what AlcaLu has going on in the field?
Any chance they are bundling discounted optical equipment with their routing gear to make the routing business look better? The router business is the only one that's not losing money, so they need to make it look as healthy as possible.
> Craig, if I understand you correctly, you think the margin disaster in optical is mainly due to a highly competitive environment.
Sorry, I worded it badly -- I was trying to agree with you. What I'd meant to say was that business in China might be another factor. But not THE factor. There's no one factor. AlcaLu does have overhead issues that other companies don't, as mentioned below.
But as to why the margin would be at a level one would call "surprising," I don't have a solid answer.
Craig, if I understand you correctly, you think the margin disaster in optical is mainly due to a highly competitive environment.
But it doesn't sit well with the gross margins other vendors achieve, hoovering around 40% and more. that's about a 23% difference, which can be directly translated to a similar average deal price reduction, assuming similar cost structure.
Optical is ultimately about hardware box shipping; hidden costs (and risks) are minimal.
if ALU would need 23% discount to the competition, this would mean a serious lack of business acumen. I simply can't believe it.
As well, ALU has entry rights into the US and Australiam markets (which Huawei and ZTE cannot share). This only exascerbates the question: what happened?
Good point about the market share, Antisceptic. AlcaLu has sold quite a bit into China, IIRC, so that could be a factor. Unfavorable deals in the past (and present), to keep footprint, wouldn't surprise me, either.
The margin in optical business is really a puzzle:
With a market share of around 25%, one would expect R&D costs and overhead to really be less significant than say, NSN or Ciena.
The especially low margins (17%!!) reflect either - price-breaking levels (doubtful), - extremely bad deals in the past (hard to understand in the boom period that the optical business experienced between 2003-2009), - huge manufacturing costs (which cannot be explained), - or someone is cooking the books? (e.g. internal component "vendor" especially expensive)
The Services margins on the other hand, are kind of expected - ALU never managed to present vendor "neutrality", and leverage it in order to create synergies between service deals.
Yanick -- Cost structure is definitely a factor. I think Notter's point, on optical in particular, was that the margins were even lower than he'd expected.
> After the Lucent acquisition I seem to remember seeing presentations to us from a "joint" AlcaLu account team that pitched both Timetra and Juniper (Lucent had a deal with Juniper). In one meeting it was like the two Product Managers (one pitching Timetra and the other pitching Juniper) were from competing companies, pointing out drawbacks with each others' platforms. Sigh. I think Cisco got the business.
Cool story, HR. Thanks. I guess there might be a lesson in there somewhere.
> Hyperrunner, I think the ALU strategy at the time was to massively discount optical and sell more routers as a package with higher margins. Give into the optical push down, but make it up in IP products. Problem is, given the IP margins, this too did not work. Sad.
Ah, I see. Well, as a strategy, it sounded ok on paper...
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