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The vendor cuts its losses and shows strength in key networking equipment sectors in the first quarter, but revenues are static.

IP, Optical Prop Up Alcatel-Lucent's Q1

Ray Le Maistre
5/9/2014
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Alcatel-Lucent set itself a financial foundation for the rest of 2014 in the first quarter, as it reported much lower losses and showed strength in some of the key divisions championed by CEO Michel Combes.

The vendor reported revenues -- excluding the Enterprise division, which is being sold to Beijing-based communications systems supplier China Huaxin -- of €2.96 billion (US$4.1 billion), down 3.3% from a year ago.

(Note: In its official announcement, Alcatel-Lucent (NYSE: ALU) reported its percentage comparisons with multiple considerations related to currency fluctuations and "perimeter" -- whatever that is -- so that sales numbers that were actually lower than a year ago were reported as percentage increases. For example, while first-quarter revenues were lower than a year ago, the company reported it as a 0.3% increase. That's very confusing, so we have ignored the company's reported percentage comparisons, whipped out our calculators, and in this article have reported actual percentage changes based on the published numbers.)

However, a year-on-year decline in revenues is not a big surprise. As part of the company's "Shift Plan" restructuring program, which is in full swing, Alcatel-Lucent has been terminating or renegotiating loss-making managed services deals, resulting in a year-on-year decline in managed services revenues of more than 50% to €99 million ($137 million). (See AlcaLu Shrinks Its Managed Services Unit and Alcatel-Lucent to Cut 10,000 Jobs.)

The company notes that, excluding managed services, revenues were up 3.9% from a year ago.

The gross margin for the quarter was 32.3%, up from 28.2% a year ago, and the net loss was €73 million ($101 million) compared with €353 million ($488 million). In addition, fixed costs were reduced by a further €143 million ($198 million) during the quarter.

The numbers pleased investors, as Alcatel-Lucent's share price increased by 3.8% to €3.04 in morning trading on the Paris bourse.

Propping up the vendor's recovery is, as ever, the IP division, though sales of transport equipment were also up, while the other parts of the business saw sales slide, as the table below shows.

Table 1: Alcatel-Lucent Q1 2014 Revenues by Division

Revenues in € millions Q1 2014 Q1 2013 Actual change YoY
Core Networking 1,352 1,311 3.1%
- of which IP Routing 549 494 11.1%
- of which IP Transport 454 428 6.1%
- of which IP Platforms 349 389 -10.3%
Access 1,572 1,697 -7.4%
- of which Wireless Access 999 1,012 -1.3%
- of which Fixed Access 460 463 -0.6%
- of which Managed Services 99 204 -51.5%
- of which Licensing 14 18 -22.2%
Other 40 52 -23.1%
Total revenues 2,963 3,063 -3.3%
Note: The revenue numbers come from Alcatel-Lucent's first-quarter financial report, but the percentage changes have been calculated by Light Reading.

The company noted that "traction around our IP mobile packet core solutions" is particularly strong, and that the 7950 XRS IP Core router attracted four new deals during the quarter, including contracts with cable operators, one of the target markets identified by the CEO. (See Cable Is Key to 'New' Alcatel-Lucent and Alcatel-Lucent Builds Future Around IP.)

In the transport equipment business, the vendor noted that "terrestrial optics recorded its first quarter of year-over-year growth since 2011," driven by 26 new deals for the 1830 Photonic Service Switch (PSS), while 100G shipments represented 30% of total WDM line cards shipments in the quarter, compared with 19% a year ago. Alcatel-Lucent is also engaged in two new 400G trials, with Ontario Research and Innovation Optical Network (ORION) and Telekom Austria AG (NYSE: TKA; Vienna: TKA).

IP Platforms, which includes the company's NFV and cloud systems, recorded an increase in revenues from IMS (VoLTE), SDM (Subscriber Data Management) and Customer Experience (Motive) systems, but revenues were down due to declining sales of legacy platforms and "portfolio rationalization."

In the Access business, Alcatel-Lucent says 4G/LTE revenues improved, driven by sales in the US, but 2G and 3G (which combined represent less than 25% of wireless access sales) were down. In fixed access, FTTX and VDSL2 sales are improving, and discussions with operators about the potential of G.fast have begun. A decline in legacy system sales countered those gains, though. (See Telekom Austria Tests G.fast.)

What happens for the rest of the year will be crucial for Alcatel-Lucent. The first quarter is traditionally the weakest for sales, so revenues will need to show notable gains if CEO Combes is to hang on to the trust of investors, partners, customers, and employees. (See Alcatel-Lucent CEO: We Can Go It Alone and Capex Trend Points to Less Seasonality – Analysts.)

— 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
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R Clark,
User Rank: Blogger
5/12/2014 | 4:41:59 AM
Work in progress
Even for a period of restructure, a 10% fall in the group selling cloud platforms and VoLTE seems a little steep. ALU stock was off 4% after this announcement. Still a work in progress.
Joe Stanganelli
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Joe Stanganelli,
User Rank: Light Sabre
5/10/2014 | 7:18:42 AM
Re: Keep it simple, you finance people
At the same time, there is a very real ethical question present as to what extent a corporation should "manage" investors.

After all, it was investors' constant demand for quarterly profits that led to publicly-traded banks making unstable investments, which in turn led to the crash of 2008.  (Meanwhile, privately held, more conservatively-investing banks did not suffer nearly as much as the publicly-traded ones did.)
brookseven
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brookseven,
User Rank: Light Sabre
5/9/2014 | 9:24:07 AM
Re: Keep it simple, you finance people
Ray,

The whole way Income Statements are dealt with is less transparent than in the past, and even then they are managed.

Start with a cash flow statement if you want the real information.

seven

 
Ray@LR
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Ray@LR,
User Rank: Blogger
5/9/2014 | 8:07:44 AM
Combes is a character...
On the ALU Q1 earnings webcast he answered a question about whether ALU was involved in 5G develpoments.

He said 'oui' (because they are) but that the main focus right nwo was on the short-term, restructuring the company and getting things back in order.

He closed out his answer by hollering 

"So nothing has changed under the sun!"

I actually laughed out loud...
Ray@LR
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Ray@LR,
User Rank: Blogger
5/9/2014 | 8:03:22 AM
Re: Keep it simple, you finance people
Yes, I agree. That is nice and clear. It would be good if others broke out their numbers like that.
Gabriel Brown
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Gabriel Brown,
User Rank: Light Sabre
5/9/2014 | 8:00:45 AM
Re: Keep it simple, you finance people
On the other hand, ALU's segment reporting (Revenues by Division) is good. It's more transparent than other vendors.
Ray@LR
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Ray@LR,
User Rank: Blogger
5/9/2014 | 7:23:53 AM
Keep it simple, you finance people
TRying to untangle the financial reports of many companies is a real struggle, espoecially when faced by non-sensical statistics.

IF companies want to show the impact of currency rate changes and other variables, mention it in the notes and/or show an alternatiev set of numbers that reflect thjose inmpacts - don't mix the two together. I found it exasperating that ALU today reported that its Q1 2014 revenues were slihgtly better in percentage terms than last year, when the actual number was lower. There should be a rule about that...

I wonder what investors think of such smoke and mirrors?

Sort it out, ALU!!
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