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Alcatel-Lucent Preps Submarine IPO, Expects Core Growth

Ray Le Maistre

Alcatel-Lucent is planning an IPO of its submarine networks unit in the first half of 2015 to raise capital for expansion of that particular line of business into the oil and gas sector, the vendor announced Thursday as it reported its second quarter financials.

CEO Michel Combes also talked about how he expects carrier spending to shift more towards the core of the network (IP and optical transport) in 2015, and is predicting a significant increase in revenues for that part of Alcatel-Lucent (NYSE: ALU)'s business.

With regards to the IPO, the vendor has not revealed details of how much it hopes to raise or what size of stake it hopes to float in Alcatel-Lucent Submarine Networks (ASN), which makes subsea communications cables and then deploys and manages them using its own fleet of cable-laying ships. But CEO Michel Combes was quick to state on today's earnings webcast that AlcaLu will retain a majority stake in the business, and that the planned IPO is not a step towards offloading the business. "This is a strategic decision, not an alternative plan. [ASN] is part of the group -- we want to grow it," stated the CEO, who added that ASN was picking up momentum following a grim 2013.

AlcaLu sees real potential for new business for ASN in the oil and gas sector, where ASN has already won a deal in Australia, though it hasn't stated what the size of the market opportunity might be. (See Alcatel-Lucent, Australia's Nextgen Team on Subsea Project.)

The move is part of the vendor's ongoing Shift Plan, which Combes says is going very well. Alcatel-Lucent's financial restructuring processes are now complete, costs have been cut, and the company is winning new business in some key focus areas, such as 4G, small cells, and SDN.

Second quarter revenues totaled €3.28 billion (US$4.39 billion), down about 4.7% from a year ago, but once multiple factors are taken into consideration, including exchange rate variations and the exclusion of the managed services business (where AlcaLu has been abandoning multiple contracts), the vendor noted that its comparable sales had grown by 5%.

Its adjusted operating income (after costs, one-time items and variables) improved notably to €136 million ($182 million) from €45 million ($60 million) and second quarter gross margin edged up to 32.6% from 31.2% a year ago. But once all items are accounted for, this is still a loss-making company, as AlcaLu recorded a net loss of €290 million ($389 million) for the second quarter.

For once, the vendor's highlights did not come from the IP division, strong though it still is. Despite recording impressive revenues of €561 million ($752 million) in the second quarter, that was down about 10% from a year ago. CEO Combes cautioned against any doomsday analysis, though, noting that the second quarter of 2013 was a particularly strong one for the IP group and that it was unwise for anyone to "over-read a single quarter."

Instead, it was wireless access that gave second quarter revenues a real boost, coming in at €1.3 billion ($1.74 billion), a year-on-year improvement of more than 22% thanks to 4G LTE-related growth in North America and China in particular. The vendor says it had 55 LTE contracts at the end of June, and 71 small cell customers.

Want to know more about the emerging SDN market? Check out our dedicated SDN content channel here on Light Reading.

What was really bold about today's statement, though, was the CEO's expectation that its core networking business, which includes IP networking, optical transport and platforms (cloud, SDN, NFV), would generate revenues of €7 billion ($9.4 billion) in 2015. This business achieved revenues of €2.72 billion ($3.65 billion) during the first half of 2014, so the vendor is clearly optimistic of a significant increase in sales in the coming 18 months if it is to reach that target.

Combes said he expects operators to start shifting their capex focus more towards backhaul and core networks following a sustained period of investment in access capabilities, and that he expects Alcatel-Lucent to be winning new business from target customer sectors such as cable and Web services. (See Cable Is Key to 'New' Alcatel-Lucent.)

He also noted that the vendor's SDN-focused business, Nuage Networks , is picking up new business – three new customer wins during the second quarter, taking the total to eight – and targeting new business with data center and financial services companies. In addition, AlcaLu is currently engaged in 55 proof-of-concept NFV trials, in addition to the virtual RAN engagement it has landed at Etihad Etisalat Co. (Mobily) . (See Eurobites: Mobily Shows Faith in NFV and Nuage Claims SDN Progress.)

But the CEO's bullish nature is not being reflected by investor activity: While the financial results were pretty much in line with what financial analysts had been expecting, Alcatel-Lucent's stock lost 8.9% of its value in early trading to dip to $3.50, possibly due to the unusual trend for the IP division's sales.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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R Clark
R Clark,
User Rank: Blogger
8/2/2014 | 12:29:07 AM
Re: Oil & Gas
I remember there was a big rush by telecom submarine companies for oil and gas business back in 2006-7 when the oil prices were skyhigh. Then they collapsed. 

Not saying that will repeat, given the current energy markets, but commodity businesses can be very volatile.
User Rank: Blogger
7/31/2014 | 9:33:28 PM
Oil & Gas
The comment on the oil and gas industry prospects is inteeresting, too. Have talked with two other vendors in the last three months or so that mentioned the same opoortunity beginning to show itself.
User Rank: Blogger
7/31/2014 | 9:31:42 PM
Re: Submarine IPO
This is indeed interesting, though maybe not as interesting as those other options. In any case, maybe good timing, as all that major submarine cable operators recently have been/soon will be forking over money for upgrades to 100G. Also, many new submarine cable routes have been announced in the last two years = lots of business opportunities.
Mitch Wagner
Mitch Wagner,
User Rank: Lightning
7/31/2014 | 1:55:07 PM
Submarine IPO

When I read the headline, I thought they were going to either IPO a submarine, or hold the IPO underwater. But this is interesting too. 

User Rank: Light Sabre
7/31/2014 | 11:50:37 AM
optical transport
I dont' know why they would stay in optical transport. It appears to be a huge money loser for them.  As indicated from this LightReading story.

Alcatel-Lucent's Optical Margins Don't Impress

User Rank: Light Sabre
7/31/2014 | 11:17:30 AM
Reactions to the quarterly report
Overall, I feel that Combes is doing what needs to be done as well as succeeding at doing it.  It's a tough environment in a company that is very diverse in culture.  Not everything is going perfectly but on a down day in the market this volatile stock is down 9%.  Though it may be exasperated by the market conditions, that's clearly a reaction.  The negativity I get, but what I don't get is even though the market's down on the quarterly report, the price target for this company hasn't moved from 4.90.

On the technical side the Nuage looks promising, the question will be do they have enough or can they build enough relationships to make a foot hold in the datacenter environment?
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