Light Reading

Alcatel-Lucent Shifts Up a Gear to End 2013

Ray Le Maistre
2/6/2014
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This could be a landmark year for Alcatel-Lucent, if the vendor can maintain the momentum it built up in 2013.

The company, which is in the midst of a major restructuring program (The Shift Plan), today reported improving margins for the fourth quarter and full year 2013 and announced it had found a buyer for its Enterprise division, one of the non-core units it is looking to offload so it can focus on its IP-based networking and managed services portfolio. (See Alcatel-Lucent Builds Future Around IP and Alcatel-Lucent Unveils Shift Plan.)

That buyer is Beijing-based communications systems supplier China Huaxin, which has struck a binding offer to acquire an 85% stake that values the Enterprise business at €268 million (US$362 million), while Alcatel-Lucent (NYSE: ALU) will retain a 15% stake. The deal is expected to close in the third quarter, once all the necessary negotiations and approval processes are complete. (See Euronews: Is Alcatel-Lucent's Enterprise Unit Sale Back On?)

AlcaLu recently announced the sale of another non-core business unit. (See AlcaLu Sells US Unit for $200M.)

On the financial front, AlcaLu reported improved gross and operating margins for the fourth quarter and full year, and even announced a net profit for the fourth quarter of €134 million ($182.4 million), though its sales were down year-on-year for the fourth quarter and flat for the full year. (See Alcatel-Lucent Reports Q4, Full-Year Results, though note that the sales growth percentages in the official release are for constant currency exchange rates that appear at odds with the reported numbers.)

Table 1: Alcatel-Lucent Q4 & Full-Year 2013 Key Financials

In € millions Q4 2013 Q4 2012 Full Year 2013 Full Year 2012
Revenues 3,930 4,096 14,436 14,449
Gross margin 34.3% 30.4% 32.2% 30.0%
Operating margin 7.8% 2.8% 2.0% -1.8%
Net income 134 -1,558 -1,304 -2,011
Source: Alcatel-Lucent

The company noted that it had achieved fixed-cost savings of €363 million ($494 million) during 2013, higher than forecast. Much of those savings came from cutting staff: The company's headcount at the end of 2013 was about 64,000, down by 12,000 from a year earlier. (See Alcatel-Lucent to Cut 10,000 Jobs.)

The lower cost base and improving margins appeared to cheer AlcaLu's investors, as the vendor's share price rose by 12.9% to €3.42 on the Paris exchange, though some financial commentators put some of that down to short sellers (who have gambled against a recovery) looking to cover their positions.

But there's no doubt that the company still has plenty of work to do, a fact highlighted by a dip in year-on-year revenues for the company's flagship IP Routing unit, part of its Core networking division. While delivering an impressive €555 million ($755.5 million) in revenues in the fourth quarter, it represented a dip from the €619 million ($842.6 million) reported a year earlier.

For the year, though, that particular line of business generated revenues of €2.25 billion ($3.07 billion), up more than 5% from 2012. And CEO Michel Combes moved quickly to allay any fears that the router business might be stalling by expressing his confidence that further growth is more than possible: On today's earnings conference call he noted that he expected double-digit revenues growth from the sale of edge and core routers -- including those used in mobile evolved packet core deployments -- in 2014. "We expect to grow faster than the market," he noted.

He also told investors and analysts that he expected operator capex in North America to remain "robust" this year, "at least comparable" to 2013 spending levels. And, of course, some of that spending is set to go to Alcatel-Lucent from Verizon Communications Inc. (NYSE: VZ), which recently selected the vendor as a key optical transport supplier. (See Analyst: Infinera Loses VZ Deal to AlcaLu.)

Combes kicked back suggestions that AlcaLu had landed that deal by undercutting its rivals. He said the deal was won because of the deep and trusting relationship with Verizon and "the strength of the product."

Combes is also hoping to pick up some new business from Vodafone Group plc (NYSE: VOD) as it starts to invest in its European network upgrades and expansion. (See Vodafone Ups 'Project Spring' Capex to $11B+.)

The CEO noted that AlcaLu is in "close discussions" with Vodafone (along with all other major suppliers) and that he expects to "get some benefit" from Vodafone's spending plans. He is also confident that Vodafone's plans will force other European operators to increase their investments to remain competitive and that the market across Europe would grow as a result.

Combes also expects to book sales from the second wave of 4G network investments in China this year and benefit from ongoing and new spending in mobile broadband rollouts in North America (from Sprint Corp. (NYSE: S) and T-Mobile US Inc. , as long as M&A doesn't get in the way) and also from LTE investments in Europe. "We also expect to see early movement in the market for small cells" in 2014, he noted, without expanding on exactly what that movement might entail. (See How Heavy Reading Called Small Cells Right.)

Not everyone is bullish about Alcatel-Lucent's financial trajectory, though: Combes still has a lot of convincing to do. (See Short Shift: Analyst Doubts AlcaLu's Cost-Cutting Ability.)

— Ray Le Maistre, Editor-in-Chief, Light Reading

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Telecom_BDB
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Telecom_BDB,
User Rank: Light Beer
2/7/2014 | 10:31:50 AM
Re: Enterprise sale
FIrst step of the Chinese government, as Huaxin is state owned, to enter into ALU and to get a better grip on the American telecom market ?
DOShea
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DOShea,
User Rank: Blogger
2/6/2014 | 9:29:14 PM
Enterprise sale
This sale definitely counts as progress, considering ALU couldn't manage to shed those assets a few years ago when it tried. The buyer sounds like a surprise--in earlier reports, the Siemens/Gores Group JV Unify was mentioned as a likely buyer.
R Clark
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R Clark,
User Rank: Blogger
2/6/2014 | 8:43:15 PM
Re: Heading in right direction
So far so good. Looks like they have costs under control but they have more to squeeze out, plus core networking revenue, their prime business, shrank 4%. They need to find an extra 15% over next two years to meet their target.
rgrutza600
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rgrutza600,
User Rank: Lightning
2/6/2014 | 7:07:26 PM
Re: Heading in right direction
It reads like he completely evaded the question regarding Verizon deal pricing. From CC transcript:

 

Sébastien Sztabowicz - Kepler Cheuvreux, Research Division

One last question, if I may. On the Verizon deal in Optics, some are speculating that you may have gained this deal at the expense of prices. What is your answer there?

Michel Combes - Chief Executive Officer and Director

I guess that you will see the answer in our accounts. What I have said since the beginning, what we are shooting for is profitable growth. So don't expect from us to deviate from this road. I guess that it happens that we had the right product with the right features for Verizon. And so this win has been done and based on the quality of the product and also the quality of the relations that we have with Verizon. I am very proud of this win, which will pave the way for the turnaround of Optics, as we have always discussed altogether in the past few quarters.
Ray@LR
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Ray@LR,
User Rank: Blogger
2/6/2014 | 3:25:56 PM
Heading in right direction
It seems that, in terms of fiscal health and longer-term survival, ALU is heading in the right direction.

But if it's true that ALU won the VZON optical deal with a 'competitive' bid, those margins might not carry on heading the right direction...
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