Evercore analysts Mark McKechnie and Zachary Amsel take a look at Alcatel Lucent in light of developments at Barcelona’s MWC.

We maintain our EW rating mostly on valuation following Alcatel Lucent SA (NYSE:ALU)’s analyst meeting at Mobile World Congress on Sunday night in Barcelona. Highlights of the presentation include 1) CEO Michel Combes laid out a fairly comprehensive and credible view of 5 key areas or architectural changes in next generation networks, and 2) the company announced its second technology partnership – this time with Intel Corporation (NASDAQ:INTC) on Network Functions Virtualization (NFV) and Software Defined Networking (SDN).

Alcatel Lucent logo

While no near-term updates were provided, we maintain our view of that we are in the early days of a multi-year global upgrade to 4G LTE with a near-term pause as the US coverage plans shift to capacity adds ahead of an accelerated spend in China, LatAm and (hopefully) Europe.

Alcatel Lucent – One year into the SHIFT plan

CEO Michel Combes outlined in no uncertain terms the progress made in his 12-month tenure. We tend to agree with his assessment of 1) improved balance sheet/liquidity following the restructuring of debt and significant equity raise, 2) a clear vision of corporate direction including IP, the Cloud, and Ultra Broadband. Our talks with Alcatel Lucent SA (NYSE:ALU)’s senior management yields a consistent message – Combes’ changes and attention to detail has resulted in a fairly significant morale turn within the company. We also point to recent wins at Sprint Corporation (NYSE:S), Telefonica S.A. (NYSE:TEF) (MCE:TEF), and Verizon Communications Inc. (NYSE:VZ)’s 100G commitment as a vote of confidence from Alcatel Lucent SA (NYSE:ALU)’s customer base.

The Architectural 5 (our words)

ALU outlined 5 key architectural drivers for next generation networks (NGN) including; 1) higher bandwidths, 2) integration of carrier networks and the cloud, 3) highly distributed architecture which brings network elements closer to the edge, 4) user-aware network intelligence and finally 5) security. We tend to agree with his assessment but sum it up differently in that NGN’s will essentially become datacenters connected by optical which link up with subscribers in the last mile (copper, wireless, coax, fiber) and content providers at the other end. NFV will play a key role in providing agile networks which can add features in days rather than weeks and we think will prove a key differentiator for carriers wishing to compete in the new OTT/Web2.0 world of content.

Intel Partnership a logical move

Alcatel Lucent SA (NYSE:ALU) and Intel Corporation (NASDAQ:INTC) announced a development partnership to further both companies’ efforts in NFV and SDN. In laymen’s terms, ALU will rely on Intel Corporation (NASDAQ:INTC)’s support for shifting more of its network functions from purpose built boxes / chips (MIPS) towards more general purpose compute / server platforms based on Intel Architecture (IA). Alcatel Lucent SA (NYSE:ALU) indicated numerous trials and commercial deals in progress with a focus on (in chronological order), virtualized 1) IMS/ platforms, 2) mobile Evolved Packet Cores, and 3) virtualized mobile RAN or Cloud RANs as platforms which ripen for virtualization in the coming years. We see this as a net positive for Alcatel Lucent SA (NYSE:ALU) as it marks its second partnership with a major silicon vendor (QCOM / small cells was the first) which we see as an asset lite / SHIFT plan method to leverage industry know-how rather than spend internally.

Alcatel Lucent SA (NYSE:ALU) does not expect immediate results – we suspect some incremental R&D from INTC in the near-term and perhaps minimal revenue contribution in CY15. More importantly, we do believe ALU’s efforts indicate a credible long-term architectural roadmap which should aid Combes’ efforts to win new carriers in the coming months/ years.

PT and Risks

Our PT is based on 13.5x our LT EPS power of $0.35 and corresponds to ~ 0.6x EV/CY14E sales. Risks include a recovery in comms infrastructure, execution risk in the midst of a management change and layoffs, and continued competition and sub-scale position for Alcatel Lucent SA (NYSE:ALU).