AlcaLu Makes Product Cuts

Alcatel-Lucent (NYSE: ALU) has started trimming its extensive product portfolio to give customers a better idea of what technology they can expect from the giant vendor in the future. The company's mobile infrastructure and optical equipment portfolios are the first to have experienced some product cuts.

As CEO Pat Russo explained during today's earnings conference call, it's a move the company's customers needed to hear. A lack of information about which products were likely to survive the Alcatel/Lucent merger led to some carrier customer indecision towards the end of 2006, and that, in turn, contributed to a poor quarter's numbers for the newly formed equipment giant.

"We had to address the portfolio and rationalization -- we had to provide clarity for our people and our customers. For the most part, we have finalized the product portfolio," based around the strategic areas the company is focused on, which Russo said are IMS, 3G, value-added services, next-generation optical and data, and broadband access in fixed and mobile. So, quite broad, really.

Yet Russo was still coy about releasing any details about products that are being discontinued. Only when asked to confirm a particular decision in the wireless business was any detail forthcoming.

Here's what the company has made public. In its fourth-quarter and full-year results presentation today, the company recorded restructuring costs of €577 million (US$749 million). The main components of this were "write-offs of intangible assets related to 3G mobile & optical/data" and "product termination related to 3G mobile & optical/data." General merger-related costs and headcount reductions accounted for less than €60 million ($78 million).

"We did a lot of work in advance [of the merger] in terms of making decisions about the portfolio and the roadmap -- how to blend and merge the feature functionality that's important to the customers, and you need to plan that to go over a couple of years. For the most part that is done, but we couldn't communicate that until we were combined," said Russo.

The process of telling the carriers happens in two phases, added the CEO. "First, we need to talk about the general portfolio, about what customers can expect. That's followed by the more technical briefings that the tech folks want to have to understand specifics around roadmaps, timeframes, and feature functionality. We started this as soon as we could, but we have a lot of customers and it takes a long time."

As a result, the first quarter of this year will also be hurt by some further carrier indecision about purchasing, and revenues are expected to be lower compared with a year ago. And that's another reason the company is making further cost reductions. (See Alcatel-Lucent Job Cull Hits 12,500.)

Russo also claimed that, among the product rationalization decisions, "there were no surprises," and that customer reaction to the decisions made has been "good." She added: "A lot has been done, but there's obviously a lot more to do."

So what has been done?

Find out on Page 2...

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^Eagle^ 12/5/2012 | 3:14:17 PM
re: AlcaLu Makes Product Cuts MaterialGirl, regards your post below:

"But that is the point. CIEN has gone from $20 to $30-plus, while NT has done the same thing. CSCO organic revenues were up about 15% year-on-year last quarter and they see more of the same. It really seems as though SA and the CRS are starting to click together.

If ALU had good optical products, the CIEN boost would not be isolated. If NT can jump, partially due to access and PBT hype, why can't ALU? In other words, if revenues were growing like they are at competitors, the cost problems would take care of themselves. That is not happening. Product seems to be the problem."

I dissagree with your conclusion that the problem is the optical products of ALU. ALU has lots of product problems, not least of which is a big list of older legacy copper gear they must support.

But their optical products are good strong offerings.

I am deep in the trenches with the optical groups of ALL the customers you mentioned (Cien, ALU, NT) and all the other major players: Huawei, Fujitsu, Ericsson, Tellabls, etc. Therefore I must correct you. If you look at the actual numbers over the last several quarters, LU gained %share in optical against all players except Huawei. Alcatel share % remained roughly the same. Ciena has NOT taken any share away from ALU in optical.

The truth is rising tide is lifting Ciena's sales.

If you dig a bit deeper, you will see the issue with ALU is bloated upper management and byzantine business proccess. Too many at the top having meeting after meeting and not getting anything done.

Another issue at ALU is that ALU is a full service end-to-end provider or carrier equipement. From dial tone through signalling and switching to optical and data routing. If you looking into the sectors where Ciena actually competes with ALU, in those specific product sectors ALU is doing quite well. Optical at ALU is alive and kicking and ALU is shipping FAR more systems, line cards, etc. than Ciena. BUT ALU has to maintain all that old legacy product based on contract agreements with major carriers worldwide. If you cut out the old copper infrastructure maintenence of product lines and cut out all the horrible ineffeciencies in management layers you get a very different picture of ALU.

also, if you are going to really do a comparison, I suggest better comparison to ALU would be Huawei & Fujitsu. All three can build out a complete carrier network for a major national carrier. Cisco cannot come even close. Nor Ciena.

Again, Cisco is NOT primarily a carrier play. It is ENTERPRISE. even the SA stuff is mostly edge of network. CRS numbers while growing is only a small niche in overall carrier CAPEX spending. CAPEX for carriers worldwide is about $219B annually (from recent research reports). CRS sales is a tiny tiny fraction of that.

I agree, Cisco is a great company. Makes lots of money. And is astute (usually) at finding niches that can be taken over and monopolized on. But to compare Cisco to ALU is not a great comparison. Now if Cisco were to truly get into the carrier space in a big way, that would be different. Just remember, Cisco is mostly a data center or customer prem play: either via sales of enterprise gear to business, or enterprise gear to carriers that gets bundled with carrier enterprise systems integration offerings, or customer plays with linksys and SA. And Cisco is data routers at all layers of network. Cisco has a trivial share of optical.

Finally, Ciena is a strong Tier 2 player in optical, they are not in top tier of suppliers. Those are: ALU, Huawei, Fujitsu, Nortel, Ericsson, Siemens. In next group is Tellabs and Ciena along with NEC, Mitsubishi, ZTE, and several others.

try compariing ALU to their peers.

ALU indeed has LOTs of problems. And in many ways is a dinosaur.

Finally, while indeed the share price of NT and Ciena has gone up, I think there are LOTs more reasons why than simple product offering. NT has done a LOT to clean up it's ship and is improving share in several areas. Ciena has done a good job of minding it's knitting and controlling costs and staying focused on the sectors where they are strong. They have indeed grown both top and bottom line. But have not taken share in optical transport % share from the big players. The tide is rising and Ciena is benefitting.

I agree with your general thrust and overall point. If ALU does not get better, they are probably going to get pretty toasty in next few years. Just don't assume that Cisco is in same space as ALU.

rainbowarrior 12/5/2012 | 3:14:18 PM
re: AlcaLu Makes Product Cuts Two world-class beauracracies joined as one with nothing between them to create communication problems and conflicts other than an ocean, different languages and deely-ingrained chauvanism. The merger has already succeeded as long as you measure success in terms of customer confusion and employee distress. Losing a couple of products is a small price to pay for the pleasure of watching this spectacle. Alu maybe toast, but at least it's french toast.
materialgirl 12/5/2012 | 3:14:21 PM
re: AlcaLu Makes Product Cuts Dear yhza:
But that is the point. CIEN has gone from $20 to $30-plus, while NT has done the same thing. CSCO organic revenues were up about 15% year-on-year last quarter and they see more of the same. It really seems as though SA and the CRS are starting to click together.

If ALU had good optical products, the CIEN boost would not be isolated. If NT can jump, partially due to access and PBT hype, why can't ALU? In other words, if revenues were growing like they are at competitors, the cost problems would take care of themselves. That is not happening. Product seems to be the problem.
yhza 12/5/2012 | 3:14:22 PM
re: AlcaLu Makes Product Cuts Materialgirl,

While there is no question CSCO is in a much better financial shape than ALU, I don't think it has much to do with ALU IPTV/Video strategy and offering.

In fact, until very recently, it was Cisco who was left behind. If anyone went to a Cisco seminar or technology presentation lately, youGÇÖll notice that a large amount of focus is on identifying ALU IPTV solution weaknesses. Kind of indirectly acknowledging their strength if you ask me.

ALU current financial mess is directly related to the merger.

1- Both vendors have a long portfolio filled with low margins and slowing products (Optical, access, mobile)

2- The merger was always going to be difficult. Both vendors are not known for efficiency or low overhead

3- ALA and LU had huge product overlap except perhaps on the Mobile side.

On the other hand, CSCO is doing very well because capital spending is back and competition is in such miserable shape.
tmc1 12/5/2012 | 3:14:23 PM
re: AlcaLu Makes Product Cuts sailboat,

you are right on the money there... also don't forget that all of the STBs that SA/Cisco sell into the MSO space is really a consumer electronics product that will eventually compete with products from 2wire, MS xbox and even Linksys. This is really residential consumer sales no different than linksys. I would guess that cisco would be lucky to claim 5-10% sales to SPs and that would be CRS, GSR, 7600 and the SA encoder, transmission and headend technology today.
mocelet 12/5/2012 | 3:14:25 PM
re: AlcaLu Makes Product Cuts "I therefore think the future lies with CSCO and cable, rather than IP-TV and ALU."

I kinda agree with material girl on this. However, service providers will still spend on CAPEX. Who's going after that? ALU.

BTW, Is Cisco doing anything for middleware? There're so many mw companies out there. I wonder why Cisco hasn't grabbed any of those (Minerva, Orca, etc.). Is it because they're not Cable quality?
^Eagle^ 12/5/2012 | 3:14:27 PM
re: AlcaLu Makes Product Cuts Materialgirl, while I agree with many of your posts and appreciate the point of view you bring to discussion, I need to correct you on one item in your post to tmc

While Cisco indeed reports that 25% of revenue comes from carriers, you need to be careful with that number. Of that 25%, a HUGE portion of it is actually ENTERPRISE sales. Few people realize that the largest systems integrator in the enterprise business is not EDS, nor IBM, nor some of the other suspects. The largest systems integrator in north america is the enterprise team (major accounts, goverment accounts, etc.) from the old SBC. For every dollar they spend with Cisco, it gets reported by Cisco as "carrier" sales. When actually SBC (now ATT) group is buying these Cisco boxes and installing them at customer premisis and providing Cisco gear as part of the solution offered to the enterprise buyer. That is why the 7000/5000 series of routers from Cisco are such a big part of Cisco's "carrier" sales. these boxes are largely NOT going into the carrier's own network, but rather sit at customer premises of large IT customers of SBC / ATT integration group. I believe far more than 50% of the 25% reported that goes to "carrier" sales is actually in this class. Sold to carriers, but not used in carrier nets.. but at end customer premises where carrier did job of systems integration. I also believe if you dig into those numbers more deeply (something cisco will never allow us to do) that the % of that "carrier" sales that is really enterprise applications is growing and that true sales of carrier infrastructure is going down. CATV is an obvious exception. As you pointed out SA acquisition is doing very well for Cisco.

DarkWriting 12/5/2012 | 3:14:28 PM
re: AlcaLu Makes Product Cuts "Unless there is a ! before cheap, I don't think the term "cheap" can be used with CRS."


Stevery 12/5/2012 | 3:14:30 PM
re: AlcaLu Makes Product Cuts I wouldn't necessarily point to the CRS as an example of how Cisco "has it right." If you are the only girl at the dance, of course people are going to dance with you.

??? If you've been smart enough to be the only girl at the dance, either by getting there first or eliminating competition, then that sounds a lot like doing something in the realm of "has it right".
materialgirl 12/5/2012 | 3:14:30 PM
re: AlcaLu Makes Product Cuts Dear tmc1:
Actually, CSCO reports 25% of revenues as coming from carriers, if you believe their reporting. Enterprise represents 45%, and small business another 25%. So, they are getting more service provider-ish all the time, which I believe is the point.

I am not an IP-TV fan. As of 12/06, we had all of 200k domestic IP-TV customers, 68M cable TV customers and probably around 5M cable voice customers (4M between CMCSK and TWX alone).

With cable set-top demand growing fast worldwide, I think IP-TV is a cable play rather than a telecom play. I do not think they will scale. CSCO provides what cable vendors want. They are the ones growing capex numbers. I therefore think the future lies with CSCO and cable, rather than IP-TV and ALU. That's how they eat breakfast, lunch and dinner. Perhaps CSCO is not carrier class, but then perhaps carrier class is not what matters here, but rather cable class.

Finally, why is the JNPR T-series, which is growing at 40%/yr, not in the came class as the CRS? What about AVCI, since T seems to like them?
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