Well, I've just finished reading the transcript of ALU's Q2 CC. If they aren't BSing, then this sell-off was was way overblown. Since I haven't been following the company very long, I don't know if they are BSing or not. They claim that they are gaining share and that their business isn't slowing as their competitors' have claimed. The only explanation for today's sell off is that the analysts and investors simply don't believe them. The macro uncertainties are certainly great right now. Below are a couple of excerpts from the CC that exemplify Verwaayen's tone of confidence. It probably won't be possible to really check him until Q4, I think, because so much of their business and their profits come from that quarter. But of course if the economy takes a nose dive, he will have a ready made excuse for not hitting his targets. We'll see.
seekingalpha.com
Ben Verwaayen
So if you look to the markets, let's go market by market and maybe compare notes on where the market dynamics are and where we are as a company. So first of all, what you see in the U.S. market, this is at the front of the revolution because what's happening is every single participant in this revolution has, one way or the other, a massive impact on what's happening in the U.S. market. So it is the build out of networks. The response is aggressive build out of 3G and 4G. The response is, at the same time, as aggressive as the build out in the Wireless domain, optical and IP. So and if then people look to what's your position in that particular market, it has to do with 2 main factors. First of all, we do enjoy great relationship with the master players in the U.S. I believe that AT&T and Verizon this quarter will be more than 10%, which is a great way to underpin the journey we have made as a company. It's not one product anymore, it's multiple products. It's a deeper relationship. At the same time, in the U.S., we have many more customers than we had 12 months ago, and our portfolio is much broader than 1 or 2 products.
And interesting enough, one of the fastest growing part of the North American market is what we call strategic industry, where you use technology that was, until recently, just used in the telecom industry and is now used in many, many different industries as well. So the whole story in the U.S. is one of deeper, broader relationship from a customer base and a better and broader portfolio.
If you look to Asia-Pacific, there are 2 interesting stories here. First of all, I think that Asia-Pacific is the region in which countries understand very well and take action very rapidly to defend their competitive position in the digital economy. They build a variety of plans, some of them massive plans, to invest in a high-speed broadband access infrastructure. So if you see Australia that's the known story. But then China, China came out with fiber cities, China broadband fiber cities. So China Telecom says, "I'm going to, between now and 2015, I'm going to bring fiber to the home to 100 million homes." And we're right in the middle of it.
So if you look to India, India will very shortly come out with a backbone story where they have the fiber backbone story to build from to bring to the rural areas the services needed to expand not just government services, but also health services and educational services. These are concrete plans, and they are happening right now. And what interesting -- what's very interesting and what has changed over the last 18 months, 24 months is that the newest technology is the hottest technology in this particular market. So where in the past, maybe, you would have a time lag, it's now happening there, 100G in China. Look at it. It's happening there....
On networks, how are we doing? Well, I make a habit of never making any comments on any of our competitors, so I'm not going to start today. But we have a different view than some views that I heard over the last couple of days. We think that IP is a great market. We think it's a growth market. We grew 35% in Q2. We see that we have a fantastic portfolio. It is global in nature, and we see an order portfolio that's very encouraging. I think that on IP, we have really captured the imagination of the market with our latest invention of the 400G. I think if I look to the customer reactions, it has been very, very, very powerful. And we have a great momentum in the markets, and I think that momentum is -- will not go away for a long time to come. So we are very positive about that.
If you look to the brother in that relationship, the brother or the sister, whatever you want to call it, it's optical. The one goes hand-in-hand with the other. And in the optical domain, we have a similar approach as we have in the IP domain. It's all about a new world. So you will see that we will aggressively expand our products portfolio in optical, and the reception in the market was great. As we grew 35% in IP, we're now growing 6% in total in optical, but 16% in WDM. So it gives you a feel that it's really -- and if I look in the order book, extraordinarily strong, it's really going in the right direction....
So wrapping up, we're growing where the market is growing. I cannot underline it enough. That is truly important. We have the capability with our global footprint and with our products to be where the market is growing. We are selective. We don't change -- chase every rabbit that we find running around. We are selective, but we are there where we need to be. And I think that this is a position we went in for a long time in the past.
We have looked to our portfolio, and we are continue to look at our portfolio. If you see the change that we made in R&D allocation over the last 24 months, has been phenomenal. I've mentioned that before. In the past, we've spent 75% on existing technology that needed to be ready-made for one customer or the other. The customization is back to a very small percentage of our R&D. And the massive part of the R&D money is now spent on new stuff, the next generation that you can see it coming through.
Ben Verwaayen (in the Q&A session)
So I will try to answer your questions without being very specific customer by customer because I'm sure that some of the customers will not be very happy if I'm going to become their spokesperson. Actually, if you look to the U.S. market, it is clear that some of our customers have indicated that they will take a good look at our CapEx, as they should. But that's a headline number. If I look to what we do with our customers, and we have looked to the project that we have in place, and I look to the number of customers that we have and the broad portfolio that we serve, I have no hesitation to say to you that I think that the U.S will remain strong for us. I am not disputing any of other people's comments. I'm just saying, looking to us, looking where our customers are, what their plans are, what they've shared with us, how they look to it, I think we have a pretty clear look in what we need to do. And I think that, by definition of where we are in that particular market, it will be strong. I'm not going to, as I said, go customer by customer. In addition to our strong relationship with our existing customer base, we are expanding our customer base. It's not just in the cable footprint that we make some very good inroads, it's also in new businesses like safety, where new technologies are used, that we see some pretty good opportunities going forward. But, let's say, let's not distract from the core of the question. I understand your question very well. In our addressable markets with our existing customers, what we have to do, I think, we have a very clear picture. And it's a positive picture, let me be clear because, otherwise, you may think it is not positive. It's strong.
Alexander Peterc - Exane BNP Paribas
Yes, Alexander Peterc, Exane BNP Paribas. Firstly, just on the IP segment, would you be able to comment on any market share progress in this quarter either sequentially or year-on-year? And secondly, a question more specifically for Paul regarding the comments you made on the fixed costs decline. Are we actually going to see more of a decline year-on-year in the second half versus what we saw in the first half on the fixed costs?
Ben Verwaayen
You will start with the cost, the easier question.
Paul Tufano
So our fixed cost reductions are back-end loaded. So you should see more decline in the back half. And the plans are in place to go execute that.
Ben Verwaayen
And I think management is -- if you talk to management in Alcatel-Lucent, you will know that they know exactly what type of actions they need to take from a cost perspective. IP, I can just say this. We have taken market share, let's take the U.S. as an example, 11 points, it is truly a great story. I think we started outside the U.S., very strong in Europe, very strong in Asia-Pacific. And only in the last 18 months we gained an enormous amount of traction in the U.S., and I'll say this to you, that traction will continue. If we look to our order portfolio, if we look into the pipeline, it's a very healthy business. And it's a business that has a lot of legs.
Anuj Krishan - UBS Investment Bank
Just a couple, if I may. Firstly, just on the optical business. It appears that growth rates on a constant-currency basis slowed down from about 10% in Q1 to 6%. I know you've talked about the legacy dragging it down, and you've talked about a very strong order book in that area. If perhaps you could just give some more granularity around that order book? And whether we should expect the growth rates to pick back up again in the second half in Optics? And secondly, perhaps for Paul, to me, it appears that to get the full year guidance of about 5% margin, you really need to execute on the cost savings in the second half. And you've talked about EUR 300 million to EUR 400 million target for the full year. Is that something that you're still standing behind, or is there any change to the full year cost savings target?
Ben Verwaayen
So let me start with the optical order book, which you talked about. We have a very strong order book. And the traction on our new products has been really, really encouraging. If you want to appreciate our optical business, this is what I would say. Up until 2008, we were a leader in the field. And for whatever reason between 2008 and 2009, there's been a difficult period of transformation to the new stuff and that we paid a price for that. I mean, brutally honest, that's what the situation is. We have now a new portfolio that is absolutely leading in the industry. It's absolutely of a very different complexity than the situation we are now working out. And I think that you will see in many aspects of our optical business that we have -- we will benefit from not just a better margin perspective, a better customer perspective, a less complex supply chain perspective, but also from the capability to bring it together with the IP platform that will enhance greatly the capacity that we have both in IP and in optical. So we have great -- we have strong reasons, we have great expectations from our optical platform.
Paul Tufano
Okay, so the fixed cost and expense reduction, as we said, the majority of that fixed cost and expense reduction will be back-end loaded. And as we look at the drivers of that reduction, let's be honest, a fair amount of those are people reduction or people costs. We're making good progress in redeploying folks to other parts of the business such that we can minimize restructuring, and therefore, cash outflow. We're continuing that focus. I think our ability to get to within the range we talked about in cost and expense, may be challenged by our ability to go do that. But nonetheless, we are able to reaffirm our guidance using other levers even if we don't make the initial guidance we talked about. |
