Managed Services

AlcaLu in Recovery Mode

It's too early to say for sure, but it looks as if Alcatel-Lucent (NYSE: ALU) might have turned a corner and be en route to greater financial stability.

But the company isn't out of the woods yet, as it's still losing money and reporting lower revenues than a year ago, as its second-quarter numbers show.

In the three months to the end of June, AlcaLu generated revenues of €3.8 billion (US$4.94 billion), down 2.4 percent from a year ago, and reported a net loss of €184 million ($239 million), compared with a profit last year (though that was achieved as a result of asset sales -- see Asset Sale Helps AlcaLu to Q2 Profit).

Table 1: Alcatel-Lucent Q2 2010 Financials
In millions of euros Q2 2009 Q2 2010 Y/Y change
Revenues 3,905 3,813 -2.4%
Gross margin 33.1% 36.1% +9%
Operating income -130 -45 +65.4%
Net income/loss 14 -184 nm*
Earnings per share (in euros) 0.01 -0.08 nm*
* Not measurable

And the parts shortage that has been affecting the ability of major vendors to fulfill their orders continues to hinder Alcatel-Lucent's operations. The company has been investing in a stockpile of components to "secure availability" for the second half of the year, a move that increased its costs. (See Parts Problems Hurt Ericsson's Q2 and NSN's 2010 Confidence Slips.)

There are positive signs, though. The company's operating losses are shrinking, its gross margin is improving, and its overall performance is much improved compared with the first quarter of this year. (See AlcaLu Feels the Squeeze in Q1.)

And according to CEO Ben Verwaayen, the company has positive momentum. "We remain focused on operational execution as evidenced by our ability to improve component availability and maintain costs and expenses discipline. Further benefits are expected in the coming quarters," he noted in the vendor's earnings statement. "Alcatel-Lucent is preparing for a strong second half of the year, backed with a growing order book. As sales trends continue to improve and we continue to see the benefits of our actions on costs, the leverage effect at the operating profit level will be significant."

Investors reacted positively too. Alcatel-Lucent's share price improved by 7.8 percent to €2.23 on the Paris stock exchange Friday morning.

So what's fueling Verwaayen's optimism? Like rival Ericsson AB (Nasdaq: ERIC), AlcaLu is benefiting from the capital expenditure revival in North America, but revenues are down from last year elsewhere. Sales in Asia/Pacific are notably lower, but that's in part due to China, where sales last year were particularly strong because of the major investments in 3G that haven't been matched in 2010.

Table 2: Alcatel-Lucent Q2 2010 Revenues by Region
In millions of euros Q2 2009 Q2 2010 Y/Y change
North America 1,202 1,489 +23.9%
Asia/Pacific 861 641 -25.6%
Europe 1,286 1,178 -8.4%
Rest of World 556 505 -9.2%
Total 3,905 3,813 -2.4%

In terms of product lines, IP and mobile infrastructure (particularly 3G/WCDMA) sales saved the Networks division, as optical and fixed access sales are down significantly compared with last year. The IP division received a further boost this week by landing a coveted agreement with AT&T Inc. (NYSE: T). (See AlcaLu, Juniper, Cisco Share AT&T Domain Status.)

The Applications and Services divisions managed only slight improvements. Alcatel-Lucent is pinning a lot of its long-term hopes on these two units. (See AlcaLu Buys Some API Smarts, AlcaLu Shows Off Its Apps Abs, and AlcaLu CEO Ben Verwaayen, Part II.)

Table 3: Alcatel-Lucent Q2 2010 Revenues by Division
In millions of euros Q2 2009 Q2 2010 Y/Y change
Networks 2,384 2,304 -3.4%
- IP 286 318 +11.2%
- Optics 728 622 -14.6%
- Wireless 972 1,021 +5.0%
- Wireline 424 366 -13.7%
- eliminations -26 -23 +11.5%
Applications 462 489 +5.8%
- Enterprise Applications 298 305 +2.3%
- Networks Applications 173 188 +8.7%
- eliminations -9 -4 +55.6%
Services 873 883 +1.1%
Other and eliminations 186 137 -26.3%
Total 3,905 3,813 -2.4%

— Ray Le Maistre, International Managing Editor, Light Reading

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