Alcatel-Lucent (ALU) reported second-quarter 2014 adjusted net loss of 14 cents per American Depositary Share (ADS) that narrowed from the prior-year quarter loss of 47 cents per ADS. Revenues came in at €3,279 million ($4,061 million), up 0.7% year over year and 12.1% sequentially at constant exchange rates.
However, shares plunged 12.2% following the announcement on Jul 31 due to the prevailing softness in the North American market, where revenues declined 2.6% year over year. Revenues from Europe and the Rest of World were down 7.2% and 15.2%, respectively. However, the company reported strong growth in Asia-Pacific with revenues increasing 25.2% year over year, driven by the rapid network roll-outs in China.
Gross margin increased 140 basis points (bps) year over year to 32.6%. The year-over-year increase was driven by cost reduction initiatives taken by the company. Sequentially, the gross margins marked an improvement of 30 bps attributable to increased profitability and the ongoing improvement in the fixed operation costs.
The ongoing restructuring of the business, as per the company’s ‘The Shift Plan,’ had an adverse impact on the bottom line. However, growth in IP and LTE technologies due to key contract wins and market share gains partially offset the loss.
Segmental Performance
Revenues for the Core Networking segment declined 10% year over year to €1,369 million ($1,862.5 million). All three sub-segments reported year-over-year decrease in revenues.
Revenues for the IP Routing division were €561 million ($763.2 million), a decrease of 7% from the year-ago quarter. The decline was due to tougher comparisons with the prior-year quarter.
Revenues in the IP Transport division, which includes terrestrial and submarine optics, dipped 6.2% year over year to €484 million ($658.5 million). The decrease was due to sluggishness in the legacy business, which completely offset the gains from the WDM (Wavelength Division Multiplexing) platform.
Revenues in the IP Platforms division declined 19.2% year over year to €324 million ($440.8 million). The decline was due to the negative impact of last year’s portfolio rationalization, which completely offset the ongoing growth in major platforms including Customer Experience Management and Payment & Policy.
Revenues in the Access division were up 9.5% year over year to €1,907 million ($2,594.5 million). Two of the four sub-segments reported revenue growth.
Revenues for the Wireless Access division were €1,299 million ($1,767.3 million), a surge of 28.1% from the year-ago quarter. This was driven by strong growth in LTE across the major regions especially in the U.S. However, the continuous decline in demands for 2G and 3G technologies proved to be a drag.
Revenues for the Fixed Access division rose 2.9% year over year to €521 million ($708.8 million). The copper and fiber technology businesses continued to benefit from network upgrades to ultra-broadband technologies leading to a strong year-over-year growth rate in the quarter. The positive trend in the copper and fiber businesses in Europe and Asia-Pacific (excluding China) continued.
Revenues from the Managed Services division were €77 million ($104.8 million), reflecting a 62.8% decline year over year, due to restructuring efforts in this business.
The company recorded Licensing revenues of €10 million ($13.6 million), a decrease of 37.5% year over year.
Other Financial Details
Alcatel-Lucent ended the quarter with cash and cash equivalents of €6,197 million ($8,431.0 million), long-term debt of €4,718 million ($6,418.8 million) and total equity of €3,377 million ($4,594.4 million).
The company reported free cash flow of negative €205 million ($278.9 million) narrower than the prior-year’s figure of a negative €247 million ($336.0 million).
Business Update
Alongside, the company announced its decision to analyze the capital opening of its subsidiary- Alcatel-Lucent Submarine Networks’ (ASN) through an IPO. This IPO is expected to strengthen the company’s position in the telecom submarine systems and its diversification into the Oil & Gas industry. This financing will enable a greater visibility and optimum capital distribution. The capital opening is scheduled to occur in the first half of 2015 with majority of the ownership retained by Alcatel-Lucent.
The Shift Plan
The company is benefiting from its ongoing repositioning as per ‘The Shift Plan’ that was formulated in 2013 to transform itself from a telecom generalist to a specialist in IP networking and Ultra-Broadband services. The company now plans to shift focus from the older technologies (2G and 3G wireless equipment) to high potential newer ones like Internet routing. Under this plan, management intends to trim costs by approximately 15% by 2015.
In the quarter, the company achieved fixed cost savings of about €94 million ($127.9 million). As such, the consolidated fixed cost savings under the plan stands at €572 million ($778.2 million).
Looking Ahead
Going forward, the company is expecting to gain from the pending reimbursement of the secured loan and the following recovery of the full patent ownership, which will mark the completion of the first phase of transformation. The company is focused on leveraging innovation to drive growth and generate positive free cash flow by 2015.
Zacks Rank
Alcatel-Lucent currently carries a Zacks Rank #3 (Hold). Other stocks in the sector worth considering at the moment include 8×8 Inc. (EGHT), Vocera Communications, Inc. (VCRA) and Ericsson (ERIC). While 8×8 sports a Zacks Rank #1 (Strong Buy), Vocera Communications and Ericsson both have a Zacks Rank #2 (Buy).
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