2013: Is This the Year Alcatel Goes Bankrupt?
By Rich Smith | More Articles | Save For Later
Alcatel-Lucent (NYSE: ALU ) reported Q1 2013 earnings Friday and -- there's no sugarcoating this -- the news was not good.
Nearly a year into a much-ballyhooed program to right its ship and save its business, the company's still losing money and burning cash like mad. Four months after negotiating a financial lifeline from Goldman Sachs (NYSE: GS ) and Credit Suisse (NYSE: CS ) -- bankers who, if you ask me, would be just as happy to see Alcatel fail and forfeit its patent portfolio -- the company's just piling more debt atop an already top-heavy debt load.
But enough about the big picture. Let's delve into the specifics. In Q1 2013, Alcatel:
Grew its revenues a bare 0.6% in comparison to Q1 2012, or ...
Viewed more pessimistically, saw revenues slide 21.2% sequentially.
Experienced gross margin slippage (0.8% worse than in last year's Q1).
Reported a $0.19-per-share net loss, versus the $0.15-per-share profit it earned last year.
Operating cash flow at the firm ran negative to the tune of $188 million, while cash flow from operating activities -- which Alcatel defines differently from OCF -- came to negative-$542 million. This is significant, because when you pair this operating cash burn with Alcatel's spending on capital investments, it works out to a total of $694 million in negative free cash flow for the quarter.
To put that number in context, $694 million is more cash than Alcatel burned in all of 2012 or 2011. It's nearly as much cash as the company burned through in 2010 ... and this time, the company burned all this cash
The only way ALU can ever survive in this is to cap the “cost of sales” to no more than 60% of the revenue. The cost of sales includes customer defaulting on debts/payments (impairment on customer receivables), taxes, penalties on contracts, construction costs, capitalized development costs, discounted sales from impairment, etc. If the cost of sales is too high and affects the overall margins ALU should drop those contracts.
The problem is not with S&G or the R&D but with the “cost of sales. Currently the cost of sales is exceeding 70%, R&D at 18%, and S&G at 17% which already amount to 105% of the revenue. This is not even counting the interest payments or the restructuring costs.
I think they should further examine ways to reduce capital development costs such as materials / services used and "employee benefits". There is only so much you can cut out of R&D and S&G. I think the cost of sales will need to be controlled better and everything else such as increase in revenue from higher sales or raising prices will just be gravy to earnings.
The bottom line is there must be a CAP on the cost of sales, reasonably at 60% of revenue at most.
Mr Michel will stop the bleeding very quickly. The government, the banks, the unions and the French media know that the surgeon has the authority to do whatever it takes .
Expect big changes before the summer.
I tend to agree. Michel is not stupid. He knows he has to get ahead of the power curve when it comes to cost cutting.
Put it this way, if Michel's intent was to simply tweak the existing restructuring plan, then that is not particularly complicated and would have been announced by now....like yesterday.
AND it would not require 7 more weeks, plus all of March, and a formal presentation in June....would it?
I think the changes will be big, and perhaps painful...but necessary.
"2013: Is This the Year Alcatel Goes Bankrupt?" It just not going to happen given cash position of E 6+ billion. Not this year. I have not seen any brokerage house or any well established analyst mention BK this year.
“Reported a $0.19-per-share net loss, versus the $0.15-per-share profit it earned last year.”
Let's put everything into the right perspective. Given that in (Q1/2012) ALU had additional income from the disposal of Genesis:
“Income from discontinued operations” = $858M (Euro 659M)
So, without the $858M income from Genesis the result of Q1/2012 EPS would have been net loss of (0.24) which is worse that Q1/2013 result of (0.20).
ALU needs to get better....FASTER.
Yes, improvements are present, and encouraging, but not good enough.
I believe the current glide path to profitability is too slow, and lacks the necessary scope to get ALU ahead of the recovery curve.
And I think in about 7 weeks Michel will prove my point by significantly expanding and accelerating the current plan with the intent of changing ALU at a fundamental level....with lots of assets sold, product lines axed, and greater headcount reduction....leaving a core of profitable businesses that ALU can actually defend.
Michel needs to act boldly, and aggressively, to stop the bleeding.
I think they threw everything bad that they could into this quarter to set the stage for Mr. Combes and his plan. Problem is ALU can't afford to wait till June, the plan should have been announced today. That being said, they have 6.2 billion in cash, for them to go bankrupt they would have to sit on their hands and do nothing to become profitable over the next 2.5 years.
"Bad" is not finite. There is no such thing as "using up" bad.
In business, "bad", and "good" for that matter, is event driven, and linked primarily to competitiveness, WHICH IS WHY IT IS SO CRITICAL THAT ALU'S RESTRUCTURING PROGRAM BE SUCCESSFUL. If ALU can pull it off, it will permit them to make more competitive bids, and in theory, win more contracts...thus avoiding "bad".
The notion of BK is a lot more complicated than their gross cash level.
ALU's annual revenue has been in a general downward trend for 6 years. And the company is not profitable, has free cash flow problems, poor margins, lacks scale in several global markets, must pay for restructuring, and must address a large amount of debt coming due between now and early 2015.
And the downstream implications of ALU's poor balance sheet, and its current lack of competitiveness, except in the US, in a bad global economy, plus the demands placed upon company cash for restructuring and major debt repayment...all take a toll on NET-CASH.
Customers then worry about liquidity, which is to say they worry about survivability...which can impact orders, which exacerbate balance sheet problems, competitiveness, etc.
So what is important is NET-CASH, and even more so, the many factors and simultaneous actions that influence net-cash levels every day. When factors and actions are negative, AND OUT OF CONTROL, it is hard imagine ALU NOT burning through a lot cash. But more to the point, it is impossible in that environment for ALU to ADD to net-cash, except by selling off corporate body parts and taking on more debt...which at some point becomes self defeating, then impossible.
And if ALU does raise cash in this matter, which they have done many times, but FAIL to successfully restructure, which they have done many times, then they will get the same result. Back to the future.
All of this is why it is so difficult for a company to get out of a corporate death spiral. It is death by a thousand cuts.
I agree it is a set up for the new CEO to shine. Rather than putting good points in this quarter they will surprise everyone in either 2nd or 3rd. This will shoot up to $2 and more. Company tactics to shine and buy cheap shares while they can.
Other than that they have to cut cost. If they don't BK is just around the corner.