While we were busy doing a little real work on Palm we noted the change in management at Alcatel with a little bit of interest.  Alcatel doesn’t fit into our research themes very well as it’s basically a giant telco conglomerate at this point but we’ve had some very profitable history with such ugly companies in the past.  (Unisys and Sterling Software both come to mind, very boring to our clients but we find 200-300% returns in fairly large stocks interesting enough in their own way.)

Alcatel is a beast with something in the range of an $18B run rate and around $1.5B in EBITDA generation per year.  As a conglomerate it’s everywhere but without much of a unifying strategy or operating plan.  The company has a long history of volatile growth and margins.  Operating margins over the last 14 years have been more negative than positive with the peak being 11% back in 1998.  It’s probably fair to say the company has not made money on a cumulative basis in the last decade or two.   The ability for the company to come up with a plan that will create some sustainable improvements in operating margin is unknown at this point.  The scale of the problems doesn’t seem to be addressed by a simple management change at the top. 

Still investors love a company with lots of "fat" to trim.  It’s worked wonders for IBM and HP in the past.  But of course for Alcatel the markets and situation is a bit more complicated.  But Alcatel has been improving the mix of business to be more services and enterprise (about 1/3 of the total now) that at least have double digit operating margins.  If management can drive these forward while rationalizing the massive overhead and corporate cost structure investors would get interested.

However when we do a little back of the envelope figuring on potential share price gains it dampens our enthusiasm.  If the company can get to a 5% operating margin the EPS is something like 40c/share the shares already reflect a 15x multiple of that.  It just means we probably have to wait until we get some cues from management as to what they plan and then spend a little more time with the business model to see how far they might be able to go. 

Meanwhile we think we have more reason to keep working on PALM.

During the current broadband networking conference being held in Paris, we had a few moments to pop into hear Mike Quigley, President and COO of Alcatel (ALA), talk about their current plans around wireline networking. We also were able to soak up some general observations from walking the floor and talking to vendors.

Not surprisingly, Alcatel is focused on the growth of broadband subscribers and the need for their customers to find ways to reduce churn and operating expenses with new services and infrastructure.

There were a few interesting highlights from an annual customer survey which indicated that 9 of the top 10 opportunities are in personalization, rather than accessibility or interactivity. Although few details were shared, it was clear that quite a few had to do with video. In fact, Quigley did say that it appeared that customers were making their initial provider choice on the basis of video and then making decisions regarding other services like VoIP. No doubt based at least in part on these results the key aspects of future platforms include being optimized for video services.

More broadly it was clear from the myriad vendor presentations that every single one of them was spending a great deal to drive their own flavor of triple-play solutions into the market with improved performance and lower pricing. One thing for sure is that software and services companies like Google can rest assured that the broadband network will be in place to support the kind of software as a service architecture core to their approach.

Motorola (MOT) was mildly surprising for us although we admit to being easier to impress in networking than software. The company was showing a very impressive fiber networking platform that Verizon (VZ) has chosen to deploy as their solution. We don’t normally think much of Motorola in this space but it appears that they have a pretty compelling offering here.

One of the benefits of the system they showed includes the ability to support a 20km+ distance to the end node delivering 2.4GB/sec (1.2GB upstream). Not yet single wavelengths of light into the home but pretty good from a practical standpoint.

There was also far more WiMAX deployment activity than we would have guessed, especially in Europe which seems to be a little 3G focused. Apparently WiMAX will have a major role here with some large players like France Telcom who owns the fixed market and has purchased the WiMAX spectrum to compete more effectively with the cellular providers.

A small public company, Alvarion (ALVR), has an pretty good portfolio of WiMAX technology products and early deployments. They company has a good deal of legacy non-WiMAX business, but if the excitement continues to build around WiMAX being a simpler alternative to the seven radios in every phone the Qualcomm guys power, talk about the stock will continue to do well and stand a good chance to be bought out by one of the larger networking players.