Shares of Alcatel-Lucent (ALU) surged a robust 16% after it reported third-quarter 2014 results on Oct 30. The company reported breakeven results, faring better than the Zacks Consensus Estimate of a loss of 2 cents. In the prior-year quarter, Alcatel-Lucent had reported adjusted net loss of 10 cents per American Depositary Share (ADS).
The company is benefiting from its ongoing repositioning as per ‘The Shift Plan,’ which was formulated in 2013 to transform itself from a telecom generalist to a specialist in IP networking and Ultra-Broadband services. The company is now shifting focus from older technologies (2G and 3G wireless equipment) to high-potential newer ones like Internet routing. Under this plan, management intends to trim approximately 15% of costs by 2015.
In the quarter, the company achieved fixed cost savings of about €73 million ($92.60 million). As such, consolidated fixed cost savings under the plan currently stands at €645 million ($818.18 million), which marks two-third of the targeted cost saving level. The achievement is encouraging as it reaffirms the company’s commitment toward its goals.
Quarterly Performance
Revenues came in at €3,254 million ($4,127 million), a decline of 5.9% year over year and 3.3% sequentially, at constant exchange rates. Revenues also lagged the Zacks Consensus Estimate of $4,346 million.
Results were impacted by the prevailing softness in the North American market, where revenues declined 14% year over year. Revenues from Europe and the Rest of World were down 13.5% and 0.7%, respectively. However, the company continues to witness strong growth in Asia-Pacific with revenues increasing 22.5% year over year, driven by the rapid network roll-outs in China and increased momentum in Japan and Australia.
Gross margin increased significantly by 210 basis points (bps) year over year and 140 bps sequentially to 34%. The improvement was driven by the company’s cost-reduction initiatives, enhanced profitability and favorable mix.
Segmental Performance
Revenues for the Core Networking segment declined 3.9% year over year but increased 3.3% sequentially to €1,443 million ($1,830.45). Two of the three sub-segments reported year-over-year decrease in revenues.
Revenues for the IP Routing division were €594 million ($763.2 million), an increase of 2.2% from the year-ago quarter. The increase was driven by strong growth in Europe, APAC (outside of China) and CALA.
Revenues in the IP Transport division, which includes terrestrial and submarine optics, dipped 3.3% year over year to €527 million ($668.50 million). The decrease was due to delay in some key contract milestones, which completely offset the gains from the WDM (Wavelength Division Multiplexing) platform.
Revenues in the IP Platforms division declined 14.2% year over year to €322 million ($408.46 million). The fall was primarily due to the negative impact of last year’s portfolio rationalization.
Revenues in the Access division declined 7.5% year over year to €1,807 million ($2,292.18 million). All the sub-segments reported decline in revenues.
Revenues for the Wireless Access division were €1,176 million ($1,491.76 million), inching down 1.5% from the year-ago quarter. The decline was due to tougher comparison in the prior-year quarter which witnessed accelerated investment in the LTE sector in key regions like China and North America.
Revenues for the Fixed Access division dipped 4.6% year over year to €518 million ($657.08 million). The business was impacted by a slowdown in specific customer roll-outs which completely offset the benefit from increasing demand in vectoring and fiber domains.
Revenues from the Managed Services division were €97 million ($123.04 million), reflecting a 48.9% decline year over year, due to restructuring efforts.
The company recorded Licensing revenues of €16 million ($20.3 million), a decrease of 46.4% year over year.
Other Financial Details
Alcatel-Lucent ended the quarter with marketable securities, cash and cash equivalents of €4,858 million ($6,162.37), long-term debt of €4,757 million ($6,034.25 million) and total equity of €3,572 million ($4,531.08 million).
The company reported free cash flow of negative €81 million ($102.75 million), narrower than the prior-year figure of a negative €227 million ($287.95 million).
Looking Ahead
Alcatel-Lucent remains optimistic about the effectiveness of The Shift Plan. Going forward, the company is focused on leveraging innovation to drive growth and generate positive free cash flow starting from 2015.
Zacks Rank
Alcatel-Lucent currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include ClearOne, Inc. (CLRO), Gigamon Inc. (GIMO) and SeaChange International Inc. (SEAC). All these stocks sport a Zacks Rank #1 (Strong Buy).
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