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Optical/IP

AlcaLu Grows Profits Ahead of Nokia Deal

Alcatel-Lucent has trumpeted improvements in profitability for the second (April-to-June) quarter ahead of its acquisition by Finland's Nokia, despite signs of continued weakness on the sales front.

The equipment maker saw its net loss narrow to €54 million ($59 million), from €298 million ($327 million) in the year-earlier period, and reported free cash flow (FCF) of €65 million ($71 million), compared with an FCF loss of €205 million ($225 million) in the second quarter of 2014.

That represented the first time the company has generated positive FCF in the second quarter since the merger of Alcatel and Lucent way back in 2006.

Investors took heart from the earnings update, sending Alcatel-Lucent (NYSE: ALU)'s share price up by more than 6% in Paris trading by noon on Thursday.

The vendor's operating margin rose to 5.1% in the second quarter, from 4.1% in the same period last year, thanks to the success of turnaround efforts under the so-called "Shift Plan."

Restructuring activities related to that initiative drove "cumulative fixed cost savings" up to €746 million ($818 million) in the second quarter from €572 million ($627 million) in the same period of 2014.

But not all pundits were happy with the performance on cost savings. George Notter, an analyst at Jefferies, noted that Alcatel-Lucent claimed to have realized Shift Plan objectives even though it had previously flagged a target of reducing fixed costs by €950 million ($1.04 billion) this year.

"We presume they're now saying the €950 million target isn't achievable," said Notter in a research note. "As we've stated previously, we think the industry may simply be too competitive for Alcatel-Lucent to really deliver on their cost savings targets and run the business at high-single digit operating margins over sustained time periods."

Meanwhile, reported revenues received a boost from foreign exchange movements, growing at a year-on-year rate of 5%, to €3.45 billion ($3.78 billion).

On a constant currency basis, however, sales were down 9% due mainly to what Alcatel-Lucent described as a "soft spending environment" in North America.

Alcatel-Lucent is more heavily dependent than Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK) on North American business, which accounted for about 44% of its total sales in the second quarter. (See Ericsson's Stock Rises on Q2 Margin Improvements.)

Hit by cuts in spending on access products, Alcatel-Lucent said revenues from the North American market fell by 18% in constant-currency terms, compared with the same period last year, but rose by 2% on a reported basis, to €1.53 billion ($1.68 billion).

There was also evidence of a slowdown in the Asia-Pacific region, where revenues grew at a year-on-year rate of 3%, to €689 million ($756 million), but fell on a constant-currency basis by as much as 12%.

Alcatel-Lucent blamed the Asian results on "project timing" in China, where it has been competing against local and Western rivals for a share of the lucrative 4G contracts being awarded by the country's mobile operators. (See Forget 3G: China Mobile Is a 4G King.)

Overall access revenues fell by 7%, to €1.77 billion ($1.94 billion), and by a troubling 20% in constant-currency terms.

But the company's core networking business continued to flourish, citing a 22% increase in sales, to €1.68 billion ($1.84 billion), and improvements across all three product lines of IP routing, IP transport and IP platforms.


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Alcatel-Lucent's core networking capabilities represent a key attraction for Nokia, which is buying Alcatel-Lucent in a €15.6 billion ($17.1 billion) deal to create an equal to Sweden's Ericsson in terms of annual sales. (See Nokia Makes €15.6B Bid for Alcatel-Lucent, Nokia & Alcatel-Lucent: What's Going On? and Nokia + AlcaLu: What the Analysts Say.)

Nokia reckons it will have a broader product portfolio than Ericsson following the merger and also expects to be able to compete more effectively against China's Huawei Technologies Co. Ltd. as a result of the move. (See AlcaLu Deal Makes Us 'More Complete' Than Ericsson, Says Nokia CTO.)

In a separate announcement, Alcatel-Lucent today confirmed that CEO Michel Combes will step down on September 1.

Chairman Philippe Camus will then assume CEO responsibilities until the completion of the merger with Nokia.

Nokia also posted a strong set of quarterly results earlier today, flagging improvements in both sales and profit margins.

Revenues were up by 9% on a reported basis, to €3.2 billion ($3.5 billion), dipping just 1% in constant-currency terms, while the operating margin grew to an impressive 16.2% from 11.8% in the second quarter of 2014.

Nokia also swung to a net profit of €352 million ($386 million) from a loss of €27 million ($30 million) in the year-earlier period.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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