Group revenues, excluding Managed Services, down 3% year-on-year, though IP Routing revenues are up 15%.

February 6, 2015

10 Min Read

PARIS -- Alcatel-Lucent (Euronext Paris and NYSE: ALU) has today demonstrated further improvement in underlying profitability with the release of its fourth quarter and full-year 2014 results.

Commenting on the results, Michel Combes, CEO of Alcatel-Lucent, said: “Our fourth quarter and full year 2014 results underline the success of our turnaround. Through the execution of The Shift Plan, we have improved our underlying profitability and free cash flow profile while we have solidified the entire organization. Entering 2015, we are in a strong position to capitalize on profitable growth opportunities and will focus on operational excellence and quality of service. The achievements we have made in our product portfolio and operational transformation make us confident we will reach our positive free cash flow target in 2015.”

Highlights of Q4 2014

  • Revenues for the Group excluding Managed Services, reflecting the termination or restructuring of loss-making contracts, declined 3% year-on-year. At actual rates, Group revenues excluding Managed Services increased 2% year-on-year.

    • Gross margin reached 34.7% of revenues in the quarter, progressing by 130 basis points year-on-year driven by favourable mix. The sequential improvement of 70 basis points was primarily driven by the reduction of fixed operations costs.

    • Fixed costs savings amounted to Euro 30 million in Q4 2014, net of Euro 16 million of reinvestments, bringing cumulative net fixed cost savings to Euro 675 million under the Shift Plan. In particular, SG&A expenses decreased by 1% compared to Q4 2013. At constant exchange rates, SG&A expenses declined 6% in Q4 2014 compared to Q4 2013. The ratio of SG&A expenses to revenues was 11.3% in Q4 2014.

    • Adjusted operating income totaled Euro 284 million in the quarter, or 7.7% of revenues, compared to Euro 293 million in Q4 2013, or 7.8% of revenues. Profitability of our Core Networking segment improved on a year-over-year basis reaching an adjusted operating margin of 16.0%.

    • As reported, the Group showed a net income (Group share) of Euro 271 million in Q4 2014, or Euro 0.08 per share, compared to Euro 134 million in the year-ago period, mainly reflecting lower financial expenses and higher income tax benefits partially offset by higher restructuring expenses.

    • Segment operating cash flow was Euro 518 million in Q4 2014, versus Euro 487 million in Q4 2013, reflecting a decrease in operating working capital, notably a reduction in inventories. Free cash flow was Euro 264 million in the quarter, a decline of Euro 97 million year-over-year.

    • At December 31, 2014, the Group had net cash position of Euro 326 million, versus a net debt position of Euro (132) million at September 30, 2014.

    • In addition to the previously announced intent to offer to retirees of the US Management Pension Plan who are receiving monthly pension benefit payments the opportunity to elect to convert those payments into a single, lump sum payment, the Group announces today that it is now in a position to extend this one-time offer to about 32,000 retirees and former employees and related beneficiaries of the US Inactive Occupational Pension Plan. The offer, which will run concurrently with the previously announced offer, is expected to be formally communicated to eligible individuals later this year. Payments to eligible participants and beneficiaries who elect to participate in both offers would occur in the fourth quarter of 2015 and constitute a complete settlement of our pension liabilities with respect to them. Payments are expected to be made from existing US plan assets and we do not expect to make any contributions to US plan assets in connection with either offer.

    • At December 31, 2014, the Group’s overall Pensions and OPEB exposure indicated a deficit of Euro (1,350) million compared to a surplus of Euro 546 million at December 31, 2013. This change primarily reflects an IFRS update to our assumptions based on new mortality rates issued in the US at the end of 2014. From an ERISA standpoint, which determines funding requirements in the US, the US pension funds remain in a sizeable surplus positive and we do not expect to make any additional contributions to these plan assets for the foreseeable future.

      Highlights of the full year 2014

    • Revenues for the Group, excluding Managed Services, were flat compared to 2013.

    • Gross margin reached 33.4% of revenues, improving by 210 basis points compared to 2013, reflecting better profitability in several business lines, favorable mix and the reduction of fixed operations costs.

    • Net fixed costs savings amounted to Euro 340 million. In particular, SG&A expenses decreased by 12.9%, leading to a ratio of SG&A expenses to revenues of 12.1%, a decline of 110 basis points year-on-year.

    • Adjusted operating income totaled Euro 623 million, or 4.7% of revenues, more than doubling compared to Euro 278 million, or 2.0% of revenues in the year-ago period.

    • Segment operating cash flow was Euro 494 million, versus Euro 211 million last year, driving a Euro 237 million improvement in Free cash flow to Euro (420) million in 2014.

    • As reported, the Group showed a material reduction in net loss at Euro (118), versus Euro (1,304) million last year, mainly reflecting reduced financial expenses and higher income tax benefits in 2014 as well as an impairment charge that impacted 2013 results.

      From a geographic standpoint, North America revenues (excluding LGS) declined by 11% year-over-year, where notable growth in IP Routing and IP Transport was offset by lower revenues from IP Platforms and from the Access segment. Europe also benefitted from growth in IP Routing and IP Transport, which was offset by the decrease in revenues attributable to Managed Services. Excluding such impact, revenues in Western Europe were up 1% year-over-year. Asia Pacific posted a 1% year-over-year decline, reflecting a temporary slowdown in China that was partially offset by traction in other geographies such as Japan and Australia. In Rest of World, MEA revenues increased at a double-digit pace, while CALA showed slight declines.

      Core Networking segment revenues were Euro 1,802 million in Q4 2014, up 1% compared to Q4 2013, driven by growth in IP Routing. Adjusted operating income reached Euro 288 million, or 16.0% of segment revenues in Q4 2014, an increase of 110 basis points compared to Q4 2013. The improvement in adjusted operating income as well as a decrease in operating working capital benefitted Core Networking segment operating cash flow of Euro 415 million in the quarter, which increased Euro 98 million compared to Q4 2013.

      For the full year 2014, Core Networking segment revenues were Euro 5,966 million, down 2% compared to 2013 due to IP Platforms legacy. Adjusted operating income improved to Euro 630 million or 10.6% of segment revenues in 2014, an increase of 280 basis points compared to 2013. Core Networking segment operating cash flow of Euro 528 million in 2014 increased Euro 46 million compared to 2013.

      IP Routing revenues were Euro 664 million in Q4 2014, increasing 15% year-over-year, with double digit growth across all regions. Market diversification momentum continued, with non-telco revenues reaching more than 15% of revenues in the quarter.

    • Our IP edge routing market share reached 26% in the rolling four quarters ending Q3’14, an increase of 110 basis points year-over-year, according to Dell’Oro.

    • Our 7950 XRS IP Core router registered 4 new wins in Q4 for a total of 36 wins to date, including a key win at an Asian Tier 1 service provider.

    • Alcatel-Lucent expanded its IP Routing portfolio with the introduction of 1) the Virtualized Service Router (VSR) which allows service providers and large enterprises to build a flexible network and operate service router software on standard servers and 2) the 7750 SR, a router which uses our FP3 400G chipset to offer high density, high performance aggregation of mobile backhaul, business and residential services.

    • Nuage Networks added 4 new wins in the quarter, now totaling 16 customers, and introduced its Virtualized Networks Services (VNS) solution which will help enterprises and service providers extend the benefits of SDN to branch locations anywhere.

    • Alcatel-Lucent and HP expanded their global alliance to incorporate IP routing and optical products into HP’s existing routing and storage portfolios, to leverage the convergence of IT and telecommunications.

    • In full year 2014, sales increased 6% compared to 2013.

      IP Transport revenues reached Euro 649 million in Q4 2014, an increase of 3% year-on-year. Our terrestrial optics business increased at a high single-digit rate in all regions, driven by our WDM portfolio. Our submarine business continued to build its pipeline with two new contracts coming into force in the fourth quarter and registering new orders.

    • Within WDM, our 1830 Photonic Service Switch (PSS) platform represented 55% of terrestrial optical product revenues in the quarter, up 11 percentage points year-on-year, and was recently used with Vodafone Spain to trial 400G transmissions between Madrid and Zaragoza.

    • In 2014, our 100G shipments represented 34% of total WDM line cards shipments compared to 26% in 2013.

    • Alcatel-Lucent recently announced the transfer of legacy R&D activity to SM Optics, an Italy-based SIAE MICROELETTRONICA company.

    • Alcatel-Lucent Submarine Networks announced a number of new deployments, including four additional branches in Sea-Me-We 5, Tasman Global Access between Australia and New Zealand, and Sealion in the Baltics.

    • In 2014, revenues in our IP Transport business were flat compared to 2013.

      IP Platforms revenues decreased 15% year-on-year to Euro 489 million in Q4 2014, as this business continues to be in a transitional phase, reflecting our strategy to rationalize the portfolio and leverage on growth engines. Performance in the fourth quarter also reflected delayed VoLTE rollouts in the US, while our Motive Customer Experience portfolio grew at double digit rate.

    • Our Motive Customer Experience has now over 300 million devices managed. According to Analysys Mason, Motive is the market leader in combined fixed and mobile device management.

    • Alcatel-Lucent introduced the Motive Security Guardian, a virtualized security solution to optimize both the delivery of services as well as the customer experience by protecting service provider’s networks, machine-to-machine (M2M) communications, and mobile and home devices from malware.

    • Revenues in IP Platforms declined 16% in 2014, while our growth portfolio saw revenues increasing at a mid-single digit rate.

      Access segment revenues were Euro 1,871 million in Q4 2014, an 11% decrease compared to Q4 2013. In Q4 2014, segment operating income was Euro 6 million, compared to segment operating income of Euro 76 million in Q4 2013. Segment operating cash flow was Euro 154 million in the quarter, a decrease of Euro 69 million compared to Q4 2013.

      For the full year 2014, Access segment revenues were Euro 7,157 million, declining 4% compared to 2013. Adjusted operating income of Euro 42 million, or 0.6% of segment revenues in 2014, represented an increase of Euro 127 million compared to 2013. Access segment operating cash flow of Euro 48 million in 2014 increased Euro 185 million compared to 2013.

      Wireless Access revenues were Euro 1,211 million, a decrease of 9% year-on-year, as LTE rollouts drove robust investments in the fourth quarter, mainly for capacity in the US and TD-LTE deployments in China, but at a more moderate pace compared the first half of 2014.

    • Alcatel-Lucent continued to diversify its LTE customer base, with 11 new wins in the fourth quarter including AINMT in Scandinavia and expand its small cell presence, signing 3 new customers, bringing our total to 76.

    • Alcatel-Lucent announced a partnership with Inmarsat on the development of a fully integrated telecommunications network to deliver broadband services to aviation passengers across the European Union.

    • Etisalat Group will be deploying Alcatel-Lucent’s virtualized radio network controller in both the United Arab Emirates and Sri Lanka allowing greater flexibility and efficiency in its radio access network operations through NFV.

    • Wireless revenues increased 4% in 2014 compared to 2013.

      Fixed Access revenues were Euro 549 million in Q4 2014, a decrease of 3% compared to Q4 2013 as lower activity in North America offset continuing demand for vectoring and fiber in Europe and APAC outside of China.

    • Alcatel-Lucent recently reached the milestone of 10 million VDSL2 vectoring line card shipments, underlining our leadership in fixed access.

    • Alcatel-Lucent recently announced GPON wins with Vodacom in South Africa as well as Liquid Telecom in Kenya and Uganda. We have also taken the number one position in EMEA with a market share of 38% in Q3’14, according to Dell’Oro.

    • In 2014, Fixed Access revenues declined 1% compared to 2013. Managed Services revenues were Euro 96 million, decreasing by 50%, reflecting our strategy to terminate or restructure loss-making contracts.

      Licensing revenues were Euro 15 million.

      Alcatel-Lucent (NYSE: ALU)

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