Alcatel-Lucent ALU reported adjusted loss of 8 cents per American Depositary Share (“ADS”) for third-quarter 2015, lagging the Zacks Consensus Estimate of earnings of 4 cents by a wide margin. The loss also significantly widened from the prior-year quarter loss of 1 penny.
However, investors didn’t seem to mind the company’s dismal results, as shares rose 4.4% in the two trading sessions following the earnings release on Oct 29. The reason behind investor optimism was likely the accelerated pace at which its proposed $17 billion merger with Nokia Corporation NOK is moving along.
Coming back to the company’s operational results, the dismal bottom-line performance was dragged down by a non-cash goodwill impairment charge.
Inside the Headlines
Revenues came in at €3,429 million ($3,814 million),an increase of 5.4% year over year at actual rate. However, the top line missed the Zacks Consensus Estimate of $3,933 million.
Growth in revenues was driven by strong sales in most of the geographies. The company sharpened its focus on next generation technologies revenues, which saw double-digit year-over-year growth in the quarter. The company also saw its business outside the telecommunications gain traction, thus boosting the top line.
Gross margin for the quarter increased 50 basis points (bps) year over year to 34.5%.
Segment-wise, Core Networking revenues increased 11.4% year over year to €1,608million ($1,788 million) at actual rates. This was driven by strong year-over-year rise in all three sub-segmental revenues, IP Platforms (25%), IP Routing (9%) and IP Transport (6%).
However, revenues in the Access segment were relatively flat year over year at €1,811 million ($2,014 million). Strong performance in Fixed Access sub-segment, which rose 6% year over year and Wireless Access (up 1%), was offset by weakness in Managed Services (down 33%) and Licensing (down 9%).
Going by geographies, the North American market continues to gain strength as revenues increased 4% at actual rates. Europe and Asia-Pacific showed impressive performance as well, rising 12% and 8% respectively, at actual rates. However, the company witnessed softness in the Rest of World, with revenues decreasing 5% year over year at actual rate.
Liquidity & Cash Flow
Alcatel-Lucent ended the quarter with marketable securities, cash and cash equivalents of €5,309 million ($5,969 million) compared with €5,777 million as of Jun 30, 2015. The company’s long-term debt as of Sep 30, 2015 stood at €4,798 million ($5,394 million), compared with €5,051 as of Jun 30, 2015. Total equity of €2,678 million ($3,011 million) as on Sep 30, 2015 decreased from €3,322 million as of Jun 30, 2014.
The company reported negative free cash flow of €96 million ($107 million) for the quarter, down from negative cash flow of €81 million recorded in third-quarter 2014.
The Nokia Merger
The proposed merger of Nokia and Alcatel-Lucent is moving along much faster than expected. Regulators in China and France recently granted approval to their proposed merger, adding to the earlier consent from the European Union and the United States. With the last of the major regulatory approvals having been secured, the companies now have the liberty to go ahead with their integration plans.
We believe that the Nokia – Alcatel-Lucent merger provides a very strong long-term value creation opportunity. The deal will effectively create a network solutions behemoth in the industry, with a global customer base and solid operational efficiencies.
Also, the merged entity can effectively leverage the emerging Internet of Things (IoT) platform and will be able to deliver competent triple-play voice, video and data solutions globally.
Our Take
Alcatel-Lucent witnessed an improvement in operations on several levels this quarter. Apart from stronger revenues, the company also saw improved profits and margin expansion. Also, the company’s Shift Plan is treading along strongly and has been a significant driver of profitability. Additionally, in the third quarter, the company achieved cumulative fixed cost savings of about €872 million ($970 million) under the Shift Plan. The company has now achieved more than 90% of its targeted €950 million in fixed cost savings.
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 the next-generation technology and services industry.
Alcatel-Lucent currently carries a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the same space are SeaChange International, Inc. SEAC and ShoreTel, Inc. SHOR, both sporting a Zacks Rank #1 (Strong Buy).
Note: 1 EUR = $ 1.1122 (period average from Jul 1, 2015 to Sep 30, 2015)
1 EUR = $ 1.1243 (as of Sep 30, 2015)
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