Alcatel-Lucent ALU reported adjusted loss of 2 cents per American Depositary Share (“ADS”) for second-quarter 2015, which compared unfavorably with the Zacks Consensus Estimate of earnings of 2 cents. However, the loss narrowed from the prior-year quarter loss of 15 cents.
The dismal bottom-line performance was mainly due to a considerable decline in spending in the North American market and higher operating expenses.
On the other hand, strong core networking segment performance acted as tailwinds. Encouragingly, shares of Alcatel-Lucent rose about 6% during the regular trading session yesterday.
Inside the Headlines
Revenues came in at €3,450 million ($3,815 million), an increase of 5% year over year at actual rate. However, the top line missed the Zacks Consensus Estimate of $3,888 million.
Growth in revenues was driven by the company’s effective execution of the Shift plan, which led to a consistent improvement in margins and free cash flow. In addition, enhancement in segmental revenues and strong sales in most of the geographies added to the revenue growth.
Gross margin for the quarter increased 220 basis points (bps) year over year to 34.8%.
As per the segments, Core Networking revenues increased 22.4% year over year to €1,675 million ($1,852 million) at actual rates. This was driven by strong year-over-year rise in all three sub-segmental revenues, IP Routing (17%), IP Transport (30%) and IP Platforms (19%).
Conversely, revenues in the Access segment dipped 7% year over year to €1,772 million ($1,959 million). This was attributable to year-over year decline in revenues of Wireless Access (12%) and Managed Services (25%) sub-segments. Nevertheless, Fixed Access revenues rose 5% and Licensing revenues soared by an impressive 80% on a year-over-year basis.
Going by geographies, despite softness in the North American market, revenues increased 2% at actual rates. On the other hand, revenues from Europe and Asia-Pacific were up 9% and 3%, respectively, at actual rates. In addition, the company witnessed growth in the Rest of World, with revenues increasing 11% year over year at actual rate.
Liquidity & Cash Flow
Alcatel-Lucent ended the quarter with marketable securities, cash and cash equivalents of €5,777 million ($6,409 million) compared with €5,550 million as of Dec 31, 2014. The company’s long-term debt as of Jun 30, 2015 stood at €5,051 million ($5,603 million), compared with €4,875 as of Dec 31, 2014. Total equity of €3,322 million ($3,685 million) as on Jun 30, 2015 increased from $2,694 million as of Dec 31, 2014.
The company reported free cash flow of €65 million ($72 million) for the quarter, reflecting a substantial improvement from negative cash flow of €205 million recorded in the second-quarter of 2014. Encouragingly, for the very first time the company posted positive free cash flow generation in its second quarter since 2006.
Nokia Merger – Recent Development
In concurrence with the earnings release, Alcatel-Lucent declared the governance structure to facilitate its proposed merger with Nokia Corp. NOK. For the transition period, Philippe Camus will serve as the Chairman & Interim CEO effective Sep 1, 2015, following the departure of the current CEO Michel Combes.
Other position declarations include Jean-Cyril Spinetta as the Lead Director of the board; Philippe Guillemot will lead the operational management of the group; Jean Raby will assist the merger completion; and Philippe Guillemot and Basil Alwan will jointly lead the integration team.
Our Take
Alcatel-Lucent witnessed a challenging quarter mainly on account of spending cuts in North American markets. However, there is no denying the fact that the company’s Shift Plan is treading on the right track and has been a significant driver of profitability. Additionally, in the second quarter, the company achieved cumulative fixed cost savings of about €746 million ($825 million) under the Shift Plan.
Moreover, Alcatel-Lucent remains highly confident of its merger with Nokia. Management feels the development will be a game changer, as the combined strength of two companies would help it become an innovation leader in next-generation technology and services industry.
Alcatel-Lucent currently carries a Zacks Rank #5 (Strong Sell). A couple of better-ranked stocks in the same space are SeaChange International, Inc. SEAC and TESSCO Technologies Inc. TESS. Both carry a Zacks Rank #1 (Strong Buy).
Note: 1 EUR = $ 1.1058 (period average from Apr 1, 2015 to Jun 30, 2015)
1 EUR = $ 1.1094 (as of Jun 30, 2015)
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