Matt Bross To Juniper? I Really Doubt It

Light Reading reported yesterday that Matt Bross, the CTO of Huawei, has left Huawei and is likely heading to Juniper.  The timing of such speculation is very interesting as Juniper executive Stephan Dyckerhoff, EVP of the Platforms Systems Division, announced last week he was leaving Juniper in the near future to pursue a career in venture capital.  Some have taken the Light Reading report and Stephan’s departure as perhaps endorsing the press report that Matt Bross is in-fact heading to Juniper.

I personally think Matt Bross is not going to Juniper.  I think Matt Bross would not be a good cultural fit with the Juniper culture and his joining Juniper would be more detrimental than helpful.  I also think it would be difficult for Juniper to parade around the former CTO of China based Huawei to its top customers as a new senior executive of the company.  The more I think about this speculation, the more I conclude it makes very little sense and Juniper’s management team and board will hopefully see it the same way.

Will Cable TV Stocks Continue to Outperform Post the AT&T Analyst Day?

Well hurricane Sandy continues to pound my neighborhood and while my standby gas generator continues to keep the lights on, a large tree just fell in front of my house.  Check out the picture below. Luckily, no one is hurt.  So with everyone safe and not much else to do, I wanted to share my thoughts on whether or not the upcoming AT&T analyst day will impact the future stock performance of Cable TV operators and AT&T broadband access equipment suppliers like Adtran, Alcatel-Lucent and Ciena.

Hurricane Sandy Hits Home

Sometimes, the performance of a stock or industry can be determined by a significant change in the competitive landscape. The performance of leading Cable TV stocks Comcast and Time Warner Cable over the past several months I believe is a case in point.  Since December 1st, 2011 Comcast and Time Warner Cable stock prices are up over 60% while the S&P 500 has only gained about 13% over the same period.   What happened to the competitive landscape after December 1st 2011 that led to such a strong outperformance of the Cable TV stocks?  Simple, Verizon announced it was purchasing the wireless spectrum owned by Comcast, Time Warner Cable and Bright House on December 2nd, 2011.  In addition, both AT&T and Verizon in 2012 have reduced their respective spending on their wireline networks as they dramatically shifted their capital spending and strategic business development towards the expansion of their respective wireless businesses.   Basically, Cable TV operators kept focusing on what they do well, namely, residential triple play while AT&T and Verizon were both in a hunt for obtaining spectrum in a manner acceptable to the FCC/DOJ and in a race to see who can build out a 4G LTE network the fastest.

The question now becomes, will this favorable competitive dynamic continue into 2013.  I think we will get part of the answer to this question at the upcoming AT&T analyst day scheduled for November 7th.  The press and analyst community has written about how AT&T is contemplating upgrading millions of rural access lines with higher speed broadband technology.  A decision is likely made public during this analyst meeting.  In addition, industry people have suggested that AT&T may be also considering a more comprehensive broadband initiative for 2013 that will also target the small medium business market to fend off an increasing effort by the Cable TV operators in this segment of the market.

A renewed focus by AT&T on rural broadband and being more aggressive against Cable in the SMB segment, could cause a shift in the favorable competitive dynamics Cable has seen since December of 2011. This could put some pause, at least temporarily, in the strong outperformance of the Cable TV stocks.  Also, if AT&T was to indicate a new rural broadband spending plan and more spending to fend off Cable in the SMB market for 2013, it could cause a bounce in the Broadband Access and Metro Ethernet equipment suppliers that supply to AT&T such as Adtran, Alcatel-Lucent and Ciena.

Is Alcatel-Lucent The Next Nortel (or Motorola)?

Is Alcatel-Lucent going to the way of Nortel (i.e. bankruptcy) or Motorola (i.e. breakup)?  It is likely that Ben Verwaayen and the Alcatel-Lucent Board of Directors are certainly thinking about this as they prepare to share more details about the restructuring plan initially announced on July 26th of this year.  These details are likely to be shared with the financial community when the company reports its 3Q results on November 2nd or sometime soon thereafter.

Alcatel-Lucent and Nortel (and to some degree Motorola) were legacy telecom equipment suppliers that suffered from three issues since the 2000 tech bubble collapse:

1)   The market entry and vast success of China based Huawei with its significantly lower cost business model

2)   Service provider consolidation, which dramatically reduced the number of customers and created a smaller group of much larger customers (e.g. Verizon = NYNEX, Bell Atlantic, GTE, MCI, WorldCom, UUNET, Alltel etc.….)

3)   Pension obligations, which further impacted their cost structure vs. newer competitors that did not have this overhead

For Alcatel-Lucent to avoid being the next Nortel, and salvaging some value for shareholders and likely more jobs for current employees longer term, I believe the proper course for the company should be to break itself up like Motorola did rather than risk a bankruptcy process to lead to such a break-up.  While there are many outcomes for such a break-up, we believe the best choice for the Company is as follows:

1) Sell Mobility and Mobile Patents to Samsung or Cisco:  While the trend towards Mobility is a convincing reason for Alcatel-Lucent to stay in the wireless infrastructure business, the company does not have enough scale vs. other businesses like IP Routing and Optical.  The rapid decline of legacy high margin CDMA technology also makes the wireless business likely loss making now and into the future.  Given US security concerns as evidenced by the recent US review of Huawei and ZTE, I believe this business could only be sold to a “Western friendly” company. Samsung makes the most sense given its already in the wireless infrastructure business (but lacks scale), has strong financials, can complement its strong mobile handset business and would welcome additional intellectual property in its ongoing patent war with Apple.  While Cisco is a longer shot given its lack of historical desire to be supplier of base stations (although it did try and fail to enter the WiMax market via an acquisition in the past), its ability to garner more presence with leading global services providers could make such a transaction somewhat enticing.    Hey, if Cisco acquired Scientific-Atlanta, why not think about them considering the Alcatel-Lucent wireless business if it went up for sale?

2) Double Down On IP Routing and Optical:  Where Alcatel-Lucent has scale, competitive technology and better prospects for profitability in my view is in the IP Router and Optical Systems market.  The company is number two globally in edge IP Routers and in the top two in Optical Systems.   The ongoing convergence of IP and Optical also provides unique competitive positioning.  While the company does have global scale in the Broadband Access market, there is little or no growth in this business going forward.  The company should likely stay in the business with a transition to more of a services/OEM model by utilizing more focused vendors in this market for future upgrades of the installed base.

3) Jettison the Enterprise Business: The Alcatel-Lucent Enterprise business is competitively in a weak position with little if any product leadership and lack of scale.  According to the company’s financial reports, the business is still generating a small profit.  I believe divesting this business and letting it fend for itself is the best outcome given it has little synergies with the service provider business and creates little or no value within the overall company.  Its not clear the Enterprise business would compete effectively as a stand alone company, but given management was not able to find a buyer for the unit over the past several years at any price, there is nothing to lose letting it go its own way.

Well those are my thoughts, lets see what Ben and team decide to do.