Capex Continues To Surprise On the Upside

A key fundamental driver of the communications equipment industry and associated supply chain stock performance is the growth in overall capital spending by service providers, including wireless, fixed and cable TV operators.  Coming into 2014, the general expectation by Wall Street analysts was for 2014 to be a decent year of overall growth in capital spending on the order of 2%-4%, with the wireless component growing much faster in the 6%-9% range. The 2014 growth expectation was due to a ramp in spending in key markets like China given the expectation that LTE would be finally rolled out in earnest, Europe given operators were expected to start growing spending after a period of under-investment in the past few years and the US given wireless operators were expected to continue to grow spending to enhance network quality and expand LTE coverage.

After reviewing some of the key telecom operator 4Q13 results in these regions and their respective comments on capital spending plans for 2014, the general bias on 2014 capital spending by operators was generally to either maintain or raise capex expectations.  In addition to expected capex spending growth in wireless I mentioned above, we also heard better spending plans in fixed networks in the US from the larger three cable TV operators and in Europe by traditional fixed operators.

I continue to view the upward bias on 2014 operator capex as favorably for communications equipment and supply chain companies.  While several companies may benefit from this trend, I continue to favor Alcatel-Lucent (ALU) and Finisar (FNSR) as stocks to benefit from this theme.  Both are beneficiaries of the upward bias on capital spending while Alcatel-Lucent has the added benefit of a restructuring story and Finisar has the added benefits of relatively higher exposure to the optical upgrade in China and ramping deployments of “white box” switches by Web2.0 companies (e.g. Amazon) that utilize their optical sub-systems.  Keep in mind, both ALU and FNSR are very volatile stocks and can have extreme negative reactions to any negative earnings or other negative macro-economic and fundamental news.  In particular, Finisar reports earnings this week and Alcatel-Lucent has exposure to emerging markets.

Here are some key highlights of recent capital spending commentary from key operators in the US, China and Europe from 4Q13 earnings calls that took place in January and February:

China: After a delayed tendering process by China Mobile in 2013 for LTE equipment suppliers, a portion of China Mobile capital spending was delayed into 2014.  This deferral into 2014, combined with all the major operators ramping LTE spending in 2014 is likely to lead to an overall China capex growth of 15% in 2014 vs. prior expectations of about 10% growth.

US – In the US, AT&T, Verizon, T-Mobile, Comcast, Time Warner Cable and Charter all raised their respective 2014 capex plans vs. prior analyst expectations.  In addition, Google announced it is planning to expand its Google Fiber network to 34 additional cities in the future, which may add to the competitive pressure in residential broadband networks in future years.  Specific capex commentary from above mentioned US operators are as follows:

–       AT&T: Announced Project Agile that will result in capex being about $21B in 2014 vs. prior estimates of about $20B

–       Verizon: Guided 2014 capex to $16.5B-$17.0B vs. prior estimates of $16.0B-$16.5B.

–       Time Warner Cable: Guided 2014 capex to $3.7B-$3.8B vs. prior estimates of about $3.2B-$3.3B given new initiatives such as all digital conversion.

–       Comcast: Guided 2014 capex about $800M higher than 2013 given initiatives around digital set top boxes and WiFi routers.

–       Charter: Guided 2014 capex higher than expected by about $400M primarily due to all digital conversion resulting in 2014 capex of about $2.2B vs. prior estimates of about $1.8B.

Europe – In Europe, there continue to be early signs of a need for network operators to upgrade their networks after a period of cautious investment in the past few years.  The two most notable examples were Vodafone and Telefonica.  Vodafone announced Project Spring in 4Q13 that will result in capex of about £7.3B in 2014 vs. £6.2B in 2013.  Telefonica raised its expected capex/sales ratio for 2014 to 15.5-16% compared to 14.5% in 2013 to fund new network upgrade programs.

 

Juniper Has The “Edge” Over Cisco

I recently wrote an article on Seeking Alpha on my views on why Juniper is currently outpacing Cisco in the router market and how this is likely to continue through most of 2014.  Specifically, Cisco’s relatively older edge routing platforms vs. Juniper and the likelihood that Cisco has confused customers in the core routing market given two different product introductions in 2013 may be reasons for Cisco’s relative underperformance vs. Juniper.  One key data point to watch in 2014 for both Cisco and Juniper in the router market is AT&T’s Domain 2.0 process, which is likely to be completed by mid-year.    Given AT&T’s desire to maximize free cash flow given increasing investor concerns in this area (i.e. AT&T’s stock price fell the day after it reported earnings given a lower free cash flow outlook for 2014 vs. 2013), it is likely that product pricing will be a key factor in the Domain 2.0 vendor selection process, especially if Cisco continues to lose share to Juniper and Alcatel-Lucent in the router market in 2014 and it seeks to stop this trend by being more aggressive in the AT&T opportunity.

Elliot Targets Activist Reforms at Juniper

Today Elliot Management disclosed it owns 6.2% of Juniper Networks and in a very detailed SEC filing, outlined its desire for Juniper to implement 1) $200M in cost reductions, 2) $3.5B in capital returns to shareholders in buybacks and initiating an ongoing dividend, and 3) production optimization including reviews of the security and switching businesses, which have been generally disappointing in the past couple of years.  Given the relative underperformance of Juniper stock over the past few years, its higher relative cost structure as compared to other companies in the networking industry and its strong cash position and cash flow generation, Elliot’s investment and objectives are not that shocking to me.

Elliot’s investment in Juniper is yet another example how activist investors are becoming more emboldened to invest in technology companies and seeking material change in either strategy, management and/or capital returns to shareholders. I wrote about this trend in topic in a prior blog post, and I continue to expect activist investors to increase their investment in the technology sector.  Recent activist investment successes in technology investments (e.g. Microsoft, Apple, Dell, Yahoo, NetApp etc.), increasing fund flows into activist funds, the overall underperformance of mature technology companies vs. the overall market (e.g. the IT sector has under-performed the overall S&P 500 in each of the past four years) and the relative cash rich nature of the technology industry vs. other sectors are all likely to continue to drive activist funds to evaluate and potentially invest in technology companies.

The Juniper situation is also very interesting given the recent changes to the senior management team and the current composition of the board of directors.  The company’s new CEO, Shaygan Kheradpir, officially started in his new role on January 1st and Bob Muglia, prior EVP of Software Solutions and a direct report to the CEO position, left the company in December of 2013 shortly after the new CEO was announced.  It should be noted that Shaygan Kheradpir has not been a CEO in the past.  The departure of Bob Muglia was not a material surprise to me given he was recruited to the company by prior CEO Kevin Johnson as both executives worked together at Microsoft in the past.  I would not be surprised to also see Gerri Elliot, current EVP Chief Customer Officer and a direct report to the CEO, also depart from Juniper in the future, as she was also recruited from Microsoft by prior CEO Kevin Johnson.  Jim Duffy of Network World recently wrote about the “ending of the Microsoft Era” at Juniper in a blog post.

Elliot’s timing on this investment is also interesting when one looks at the current Board structure and the fact that Juniper usually has its annual shareholder meeting where shareholders vote for directors in May of each year.  While the press has written often how the new CEO of Microsoft will have to deal with two former CEOs on the Microsoft board, Shaygan Kheradpir (CEO of Juniper) has two former CEOs (Kevin Johnson and Scott Kriens) and the founder (Pradeep Sindhu) on the Juniper board.  I would not be surprised if Kevin Johnson decides not to seek re-election in the upcoming May board meeting given his recent retirement from the company as CEO.   It will be interesting to see the dynamics between Elliot and Juniper over the next few months leading up to the shareholder meeting.

Cisco – What Happened and What Is Next

I recently wrote an article on Seeking Alpha on Cisco, which can be found on this link.  The key points in the article are as follows:

Cisco really surprised Wall Street when it reported last week as its guided to a decline in revenues of 8%-10% year over year. Cisco has never reported such a decline when the US is not in a recession. With US GDP growth improving in the past three quarters, but Cisco’s orders decelerating, the guidance Cisco provided is disturbing.

The weak guidance is likely due to three main points:

1. Cisco is not focused on growing its set top box business, as the company de-emphasizes lower margin solutions/products for the home given the exit of its Consumer business a few years ago and the sale of its Linksys home networking business.

2. Cisco if facing major product transitions in high end switching and routing that are likely to impact year over year sales growth for 2-4 quarters.

3. Cisco is fighting an emerging but significant battle against cloud commoditization as Amazon and other cloud operators deploy lower cost “white box” networking equipment rather than traditional equipment from companies like Cisco.  Of the three issues Cisco is facing, this is the one that investors will focus on the most longer term in determining whether to invest in the stock or not.  Cisco’s recent launch of Insieme/ACI is how the company plans to attack the threat of “white box” networking.

Cisco’s weak guidance and commentary that business slowed at the end of the quarter combined with overall finished goods inventories being slightly up sequentially is likely to lead to Cisco managing down inventories in the next quarter. This may result in lower than expected orders to Cisco’s supply chain.  Suppliers and contract manufacturers that are exposed to Cisco could be impacted by these reduced orders.  Supply chain companies that recently have had high exposure to Cisco include Cavium, EZchip and Finisar, although it is fair to say these stocks have already been hit post Cisco’s results and may be discounting the bad news.

Is Cisco Investing in C-RAN?

While most Cisco investors will be primarily focused on the company’s official launch of the Insieme Nexus 9000 data center product on November 6th and the company’s earnings report on November 13th, I wanted to share my opinion on what Cisco may be working on to disrupt the traditional wireless infrastructure market.  CEO John Chambers recently made some bold statements in an interview with Barron’s stating that Cisco has invested in a start-up as part of the company’s disruptive plan to enter the traditional wireless infrastructure market currently served by Alcatel-Lucent, Ericsson (ERIC), Huawei and Nokia Solutions and Networks (NOK).  My guess as to what Cisco is considering for this disruption is Cloud-Radio Access Network (C-RAN) technology.  In theory, C-RAN technology aims to centralize (“in the cloud”) the baseband processing done at each cell site base station in wireless networks resulting in a more optimized utilization of baseband resources.  In addition, C-RAN facilitates joint processing and scheduling between various cell sites allowing for reduced interference, increased throughput and improved performance of the network. C-RAN also supports less energy consumption, which would support Cisco’s sustainability efforts and a more environmentally friendly deployment of wireless networks.  C-RAN also fits the Software Defined Networking (SDN) and Network Function Virtualization (NFV) framework, which Cisco aims to exploit for new revenue streams.  Commercial deployment of C-RAN technology is probably at least a couple of years away, but given the traditional wireless infrastructure market which Cisco does not current play in is $40+ billion in size, and the company has already made $2 billion of wireless acquisitions in the last year in other segments of the wireless market, it would seem the logical path for Cisco to try to enter the wireless market.  Time will tell what Cisco actually is planning for entry into the wireless infrastructure market.

For more information on the topic of Cisco potentially investing in C-RAN technology and my current thoughts on Cisco’s stock, please visit my recent article on seekingalpha.com.

 

 

 

Marlin Continues Its Optical Rollup With Tellabs Acquisition

Marlin announced today it was acquiring Tellabs for $891 million in cash. Given Tellabs has a net cash position of about $542 million, the actual net cash paid by Marlin will only be around $350 million or about 0.4x projected 2013 sales.  As I wrote in a prior post, Marlin is attempting a rollup in the communications equipment market, with a particular focus in the optical transport segment.  This rollup strategy in my view will be challenging given the very competitive and R&D intensive nature of the optical market, the market share loss trends and lack of scale of the companies they are acquiring and the integration challenges of combining multiple businesses across different geographies.  In particular, neither Tellabs in the metro DWDM market nor NSN Optical in the long haul DWDM market is a scale player vs. their respective competitors. On the other hand, Marlin has the advantages of paying relatively low valuations for the respective optical assets and is buying these assets as the secular growth outlook for the optical market is improving as evident by the financial and stock performance of optical peers such as Ciena, Finisar, Infinera etc.

The history of rollups in the communications equipment market, however, is not very favorable.  Companies that have attempted value oriented rollups like Zhone and Genband over the course of many years have shown that communications equipment rollups are difficult to execute even when paying low valuations for the assets.  Arris has shown better results in rolling up the cable TV equipment market, although one could argue Arris began its rollup efforts from a better position in terms of relative market share and scale.  Finisar, which has pursued a rollup strategy in the optical component segment, has shown volatile results due to very cyclical nature of the optical components market.  Ciena’s acquisition of Nortel’s optical assets has proven to be a positive for the company, but much like Arris, this scale driven acquisition was done from a better relative position of scale and market from where Marlin is beginning its efforts.

Prior to the planned acquisition of Tellabs, Marlin had already purchased the optical unit of Nokia Siemens Networks (NSN), which focused primarily in long haul DWDM optical systems, and certain technology assets from Sycamore Networks in bandwidth management, and named the unit Coriant. Tellabs will provide Coriant legacy optical technology in digital cross-connects, which is in secular decline, metro DWDM technology (which is complementary to the NSN long haul DWDM unit), broadband access technology in PON, wireless backhaul data products and a declining services unit.  I personally thought Adva or even the Fujitsu Network Communications optical unit would have been better assets for Marlin to combine with Coriant given better scale in metro DWDM than Tellabs, although these assets were likely more complicated to acquire (e.g. price, ownership structure, etc.).  Tellabs on the other hand was likely an easier transaction given the company has seen multiple CEO and CFO changes in the past couple of years, had an activist investor seeking a financial exit and the company has been on a consistent downsizing path with a reduction of its total headcount by about 33% in just the past six quarters.

My guess is that Marlin will seek to combine the metro DWDM and Data products from Tellabs with the existing Coriant assets and seek synergies in SG&A and R&D within these businesses.  Putting together the NSN optical and Tellabs optical/data businesses can be successful if Marlin is able to reap synergies and reverse share loss trends of both Tellabs and NSN Optical by convincing global Tier 1 service provider customers that Coriant now has scale and technology assets to compete and grow.  Tellabs and NSN Optical were at risk of losing Tier 1 customers globally; perhaps together Marlin is betting this can be avoided and turned around.  The cross-connect and services unit will likely be run for cash and the Broadband Access unit will likely be put for sale.  A company more focused in the Access market and with a decent relationship with AT&T (e.g. Adtran), may see some value in the historical Fiber To The Curb assets Tellabs has in the Bell South region of AT&T as AT&T seeks to upgrade this part of their network in the future.

Disclosure: Any company mentioned in the post may be a client or a potential client of NT Advisors LLC.

What Does Cisco Have Up Its Sleeve With Insieme?

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I recently wrote an article on Seeking Alpha discussing my view on the potential strategic objectives of Cisco’s Insieme spin-in. Cisco plans to formally announce the Insieme product on November 6th in NY.  A quick summary of the article on Seeking Alpha is as follows:

The three main strategic objectives of Insieme in my view are:

–       Attack Nicira/VMware’s (VMW) pure software approach to Network Virtualization via a converged hardware/software approach to be delivered by Insieme’s Application Centric Infrastructure solution.

–       Attack lower cost and “White Box” data center Ethernet switches potentially enabled by VMware and/or Software Defined Networking (SDN) as Insieme is likely to have significant improvement in price/port metrics for Ethernet switching.  Its interesting that John Chambers, the CEO of Cisco, highlighted the “White Box” switch as a major threat to Cisco just a week or so ago in a Barron’s interview, knowing that the Insieme launch is just a few weeks away.

–       Expand into non-traditional markets or markets with limited market share in the data center via virtual implementations of traditional security and Layer 4-7 appliances (and perhaps even some elements of flash storage given Cisco’s recent acquisition of privately held WHIPTAIL)

Over the past 18 months, Cisco has been aggressive in filling its product weaknesses via acquisitions (e.g. Sourcefire in security) and addressing the market’s concerns around network virtualization and SDN.  The Insieme launch, in conjunction with prior announcements around Cisco ONE and OpenDaylight, will likely be the last Big Bang effort by Cisco in 2013 to take on the threat of VMware/Nicira and convince the market that Cisco has the right data center architecture for the future of networking as well as diminishing the threat of the “White Box” network.

 

 

 

AT&T Domain 2.0 – Who Will Flinch?

On September 23rd, AT&T issued a press release on Domain 2.0, which outlines at a high level its next generation network vision and supplier strategy.  As part of this strategy, AT&T plans to use Domain 2.0 to transform its network through utilization of Software Defined Networking (SDN) and Network Function Virtualization (NFV).   In doing so, AT&T plans to enhance time to market and flexibility of new services as well as beginning a downward trend in capital spending likely beginning in 2016.  The goal is to achieve a downward bias in capital spending through separating hardware from software and control plane from data plane in traditional network infrastructure products while also improving software management and control.  The goals of Domain 2.0 are more focused on a network transition, faster service creation and lower capital spending, as compared to the goals of the 2009 Domain 1.0, which were to reduce cost and time to market for new services by dramatically reducing AT&T’s supplier base to a much smaller set of strategic suppliers/integrators.

While AT&T is certainly sincere in its plans to evolve towards SDN and NFV, I also think the public announcement of the Domain 2.0 strategy serves as a message to its shareholders that through the implementation of Domain 2.0, AT&T expects capital spending to begin to decline starting in 2016.  This is an important message from AT&T as it is likely to have increasing pressure on its cash flow and cash needs beginning in 2014 given higher cash taxes and potentially a significant acquisition overseas.

Wall Street analysts that cover AT&T have often written that the company will likely have to pay higher cash taxes in 2014 unless the current bonus depreciation rules get extended.  The increase in cash taxes beginning in 2014 is likely to raise the dividend payout ratio at AT&T from around 65%-70% to close to 75% next year according to analyst reports.  At the same time, AT&T has a history of raising its dividend annually.  The likelihood of higher cash taxes and dividends next year, thus, will result in lower available cash for stock buybacks and acquisitions.   Clearly AT&T would like a way to reduce its capital spending if possible.

Regarding acquisitions, the press and Wall Street analysts have recently both written that AT&T is likely to make a significant international acquisition in 2014 and some are guessing that Vodafone (post its sale of its ownership of Verizon Wireless to Verizon) is a likely target.  A large acquisition on the scale of Vodafone is likely to require the addition of significant debt on AT&T’s balance sheet (e.g. some analysts suggesting over $70 billion), resulting in additional debt service and a more levered balance sheet.

In my view, the public messaging of Domain 2.0 was targeted to two distinct audiences, namely, AT&T shareholders and equipment suppliers. For its shareholders, AT&T was messaging that it plans to help offset the increasing dividend payout ratio and potential higher debt service due to any future acquisition through a lower capital spending trend after Domain 2.0 begins to be implemented.  For its equipment suppliers, AT&T was messaging that it plans to use SDN and NFV to extract a more agile and lower cost network and to be prepared for this change through lower pricing facilitated through separation of hardware/software and control/data planes (not that the equipment vendors really needed any public messaging from AT&T on lower prices as that is business as usual).   In a sense, AT&T is partly using this press release to remind its equipment suppliers know the “hammer” on pricing is coming and be prepared to help them migrate towards an SDN/NFV architecture or potentially be eliminated as suppliers in Domain 2.0.

Coincidently, Barron’s interviewed the CEO of Cisco Systems, John Chambers, the same week that AT&T issued its Domain 2.0 press release.  According to the Barron’s article, when asked what Cisco’s biggest competitive threat is, Chambers mentioned that at or near the top of the list are service providers who just buy cheap “white box” routers and switches.  While it may be just a coincidence that Chambers made this comment just a few days after AT&T made the public release of Domain 2.0, which implies a migration towards less software intensive routers and switches, its does raise the question on how serious AT&T will be in its migration plans to SDN/NFV and whether Cisco is willing to adjust to meet the needs of AT&T.

Most significant equipment suppliers to AT&T typically have a high dependency to AT&T with sales typically near or above 10% of total company sales (e.g. Ciena, Alcatel-Lucent, Juniper, Adtran etc.).  Given the broad nature of Cisco’s business, however, AT&T is not as material a customer to Cisco as it is to other equipment suppliers.  While not as significant a customer, AT&T is an important customer to Cisco, and Cisco wants to expand its presence at AT&T beyond routing and switching to also include optical equipment given its recent product launches that converge optical and packet technologies into new platforms.  The convergence of packet and optical technologies is also a likely part of Domain 2.0 given this convergence is an enabler of reducing network cost as IP packets and flows can be carried more cost effectively in a converged IP/Optical network.

So the question is, who will flinch in AT&T’s path towards Domain 2.0, Cisco or AT&T.  AT&T has a network vision and higher priorities for its cash in the form of cash taxes, dividends and acquisitions and will seek to reduce capital spending in the future.  While these higher priorities always existed, SDN and NFV now provide an architectural change that could facilitate lower capital spending in the future.  Cisco is the largest and strongest financial company that spans both packet and optical technologies among AT&T’s suppliers; is not heavily dependent on AT&T as a customer as compared to most other suppliers to AT&T; and has a large installed base at AT&T.  Cisco will not easily submit to separately selling its hardware from software and data plane from control plane in Layer 2/3 and converged optical/packet products.  It will be clearly be an interesting process to watch, one that will likely have ramifications for other service provider SDN network migrations in the future.

Disclosure: NT Advisors LLC may in the past, present or future solicited or generated consulting services from any company mentioned in this post.

The Tangled “Web” of Cisco, EMC and VMware

I recently wrote some articles on SeekingAlpha.com on the Cisco/EMC/VMware dichotomous relationship, Palo Alto Networks and Infoblox.  I have provided a quick summary and links to these articles below.

Cisco/EMC/VMware: I continue to be positive on Cisco stock and expect the company to formally launch its widely anticipated Insieme product at the Interop NY trade show in October.  CEO John Chambers will be keynoting at the Interop conference. I do not think John has done a keynote at an Interop trade show for many years, so it is likely Cisco wants to use this trade show as a platform to make a big announcement.  The launch of Insieme, the recent acquisition by Cisco of solid state drive storage vendor WHIPTAIL and the introduction of the NSX network virtualization platform by VMware at VMworld a few weeks ago continue to highlight the increasingly dichotomous relationship between Cisco and EMC/VMware.  I think Cisco and EMC/VMware will continue to promote their VCE partnership which has been successful to date, but at the same time seek to both be the leading player in the virtual and physical domains of the emerging next generation software defined data center.  At some point, one has to question when one of these companies makes a strategic move that could truly threaten the VCE relationship.

Palo Alto Networks:  While Palo Alto Networks remains a high growth company and leader in the security market, I am not positive on the stock given its high valuation, the low growth nature of the overall security firewall appliance market and the beginning shift in security spending towards cloud based security solutions.  Palo Alto does have a cloud based product called WildFire, and thus could capture a good part of the shift in security spend. To me, the success or lack of success of WildFire will be the main catalyst to watch for the stock in the longer term as well as the ultimate outcome of its ongoing litigation with Juniper Networks.  As a side note, I also was not a big fan of the company’s decision to exclude its legal expense related to its ongoing litigation with Juniper from its pro-forma guidance.  To me legal expenses related to lawsuits, inventory write-downs etc. are part of ongoing operations and should not be excluded from pro-forma results.  Obviously, there are many different opinions on this topic and I am sure Palo Alto had some valid reasons whey they chose to exclude the legal expense from their guidance.

Infoblox: I have been positive on Infoblox given it has a leadership position in a unique niche in the automated network control market and is seeing new product success via their DNS firewall security product.  DNS cyber attacks are becoming more prevalent, which could set the framework for increased awareness and demand for the Infoblox DNS firewall.  The stock, however, has had a significant appreciation this year and at this point the valuation probably does not support significant upside from these levels.

What To Do With ALU – Part 2

Over the past several months I have written often about my positive view on the communications equipment sector, particularly stocks with exposure to service provider capital spending. One of my favorite names as a play on this theme has been ALU.  I continue to remain favorable on stocks exposed to service provider capital speeding and in particular, ALU.  This week, the sector has had a strong performance, and I think the bias will likely continue to be positive in the coming months. The main drivers to the sector performance this week were: 

1. Positive earnings and outlook from Ciena on Tuesday as well as its positive commentary on the global 100G optical spending cycle

2. Positive mid-quarter bookings commentary from the CEO of Juniper at a Wall Street Investor conference on Tuesday as well as his positive commentary on the service provider router market

3. The sale of Vodafone’s stake in Verizon Wireless back to Verizon for $130 billion, of which about half will be in the form of cash.  Vodafone is likely to use part of this cash to increase capital spending in its other properties in Europe, which could form the beginning of a capital spending recovery in Europe.

Specific to ALU, there were two other perceived positives:

1. The sale of Nokia’s cell phone/device unit to Microsoft, which will add over $7 billion in cash to Nokia’s balance sheet.  Investors are hoping that once the device unit sale closes in 4Q13, the dramatic increase in cash at Nokia will enhance the probability of Nokia acquiring the wireless division from ALU.  Earlier in the year Nokia bought out Siemens’ portion of the NSNS JV and, together with other divestments in wireline infrastructure, has become focused primarily on wireless infrastructure and services.  A potential sale ALU’s wireless business to Nokia is something I have written about in the past as being a positive for ALU if it were to occur given ALU’s lack of scale in wireless.  Such a sale make ALU a more focussed company and more of a pure play on IP Routing and Optical where it has scale and technology leadership. 

2. The new CEO of ALU, Michel Combes, spoke at an investor conference and emphasized his number one priority is generating positive cash flow, in a great part through successful implementation of his “Shift” restructuring plan and generating at least $1 billion in asset sales.  I think Michel is more willing to consider a sale of the wireless unit (or part of it) than the prior CEO, but I think it is fair to say he will continue to focus on improving the wireless division’s margins and revenue growth rather than hope or depend on an asset sale as the main course of action.  Michel seems more focused on returning ALU to profitability and positive cash flow than the prior management team and less wedded to the prior strategy of keeping ALU being an end-to-end equipment supplier.  The fact that ALU hired an ex investment banker as its new CFO, also suggests “deal making” to enhance the cash position of the company may be a higher priority than in the past.

My sense is the positive spending commentary from Ciena and Juniper, the likelihood that European spending can only get better given a more cash rich Vodafone and the beginning of the 4G LTE upgrade cycle from China Mobile starting in 4Q13 will continue to provide a positive backdrop for technology companies exposed to service provider capital spending.   While Cisco’s surprisingly soft earnings report from a few weeks ago put a damper on the sector, most of Cisco’s issues were related to tough year ago comparisons in Japan, weak spending from certain emerging markets and China (which may partly be due to political issues) and a  declining set top box business.  These are not indicative in my view of the service provider spending catalysts I mentioned above.

I continue to be positive on ALU and remain long the stock but highlight that it remains a volatile stock, especially after the very strong performance of over 200% off the bottom in the past year. 

Disclosure: NT Advisors LLC may in the past, present or future solicit and/or generate consulting revenues from any company mentioned in this post.