Alcatel Incurs Loss in Q2

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Alcatel-Lucent, S.A.(ALU) reported net loss (including one-time items) from continuing operations of 51 cents (€0.39) per ADS in the second quarter of 2013, worse than the Zacks Consensus Estimate of a loss of 11 cents. In the prior-year quarter, Alcatel had reported earnings per ADS of 22 cents. The quarter’s loss was primarily attributable to increased restructuring charges of €194 million ($253 million) and impairment of assets of €552 million ($720 million).   

However, excluding the negative impact of the purchase price allocation entries, loss per ADS came in at 50 cents compared with a loss of 20 cents per ADS in the prior-year quarter.

Total Revenue

In the second quarter of 2013, Alcatel posted revenues of €3.6 billion ($4.7 billion), up 1.9% year over year and 12.0% sequentially. Revenues during the quarter were driven by a strong 26% year-over-year increase of IP revenues and 22% growth in LTE technology.

Revenues by Geography

Geographically, North America posted a 17.1% improvement year over year. However, Alcatel witnessed mixed trends in Asia Pacific, which resulted in a low single-digit decline of 5.3% year over year. Strong performance in Japan and financial stability in China were partially offset by continued low volume of activity in the Asia Pacific region. Further, cautious spending in Europe resulted in a decline of 7.0% in revenues from the region. However, revenues from the Rest of World were down 12.7% as continued traction in Brazil was more than offset by poor results in Central and Latin America, the Middle East and Africa.

Segmental Performance

Revenues for the Network and Platforms segment increased 5.9% year on year and 12.9% sequentially to €3.1 billion ($3.9 billion). Most sub-segments reported a year-over-year increase in revenues.

Revenues in the IP division increased significantly by 20.9% year over year, driven by strength in the edge routers and carrier Ethernet switches across regions, especially in the US and APAC as well as EMEA. The combination of the IP and Optical portfolios is gaining momentum as leading telecom companies are resorting to it to meet increased data demands. Further, the IP Core router is gaining further traction. Meanwhile, the company’s Nuage Networks, its venture focused on software defined networking (:SDN) solutions, is also performing well and particularly so in North America and Europe.

The Wireless division reported a 1.1% decrease from the year-ago level. Trends from the first quarter continued and Alcatel witnessed strong growth in LTE and RFS, which was offset by an overall decline in 2G/3G technologies. The CDMA revenues now represent approximately 20% of wireless revenues. However, LTE reported strong revenue growth, as the US continued to drive growth in LTE. Further, the company continued to focus on driving small cell adoption as the technology helps adding capacity and coverage to the mobile networks.

On Jul 30, Alcatel and Qualcomm Incorporated (QCOM) formed a collaboration to develop small cell base stations that enhance 3G, 4G and WiFi networks to improve wireless connectivity in residential and enterprise environments. These next-generation small cells would combine Alcatel-Lucent's proven expertise and innovation in developing small cell solutions with Qualcomm Technologies' industry-leading mobile and networking technologies to enable ultra-broadband wireless communications.

Fixed Networks grew 3.3% year over year, reflecting continued strong growth in copper, especially in the US and Europe. This growth was partially offset by weakness in ONT fiber products, representing less than 30% of fixed networks products.

However, the Optics division reported a decline of 7.0% year over year. The WDM portfolio showed mid-single digit growth in the quarter, led by the U.S. and APAC, as well as strong progress in the order level, which grew 40% year over year. This growth was partly offset by continued declines in the company’s legacy products, representing 25% of the optical revenues.

Revenues at the Services segment grew 22.3% year over year to €285 million ($372 million), but declined 2.7% sequentially. Strong growth continued in Network Build and Implementation (:NBI) and Integration Services, both of which benefited from network rollouts in the US. In addition, Alcatel was recently awarded a three-year frame agreement to provide a mobile video optimization solution to Norway’s Telenor Group, which is included in the professional services.

Revenues in the Focused Business declined 18.3% year over year and 11.5% sequentially to €272 million ($355 million) in the second quarter of 2013. The decline was primarily attributable to weak markets in the Enterprise and Submarine segments.  

Revenues from the Managed Services segment decreased 14.7% to €215 billion ($280 million). However, Alcatel entered into 5 new long- term contracts during the quarter. This is expected to improve the company’s results in the coming quarters.

Margins

Gross margin for the second quarter was 31.9%, up approximately 10 basis points (bps) from 31.8% in the year-ago quarter. It increased 250 bps from 29.4% sequentially. The sequential increase in gross margin was driven by higher volumes and favorable product mix.

Operating expenses for the quarter decreased 4.3% year over year on a constant currency basis, due to the restructuring initiatives taken by the company. SG&A expenses declined 12.7% year over year on constant currency basis. Sequentially, operating expenses declined 3.0% on constant currency as SG&A contracted 5.9% on constant currency basis.  

Balance Sheet & Cash Flows

Exiting the quarter, Alcatel had a net debt of €794 million ($1.0 billion) versus €358 million ($458 million) of net cash as on Mar 31, 2013. The sequential increase in net debt is attributable to an adjusted operating income of €46 million ($60 million), which was more than offset by a negative change in operating working capital requirement  (€98) million ($127.9 million).

Free cash flow at the end of the quarter was comparatively better at negative €248 million ($324 million) compared with negative €533 million ($675 million) in the previous-year quarter and negative €510 million ($653 million) in the previous quarter.   

Performance Program

In July 2012, the company announced a Performance Program primarily targeted at additional cost savings totaling €1.25 billion by the end of 2013. At the end of the second quarter 2013, Alcatel achieved more than 50% of its fixed cost saving target of €250 million to €300 million. Therefore, the company had already achieved €120 million of the €175 million target in the reported quarter.  

Outlook

The company reported net loss during the quarter but it was primarily due to restructuring charges and impairment. However, revenues and gross profits indicate the possibility of a better performance going forward.

Alcatel currently has a Zacks Rank #4 (Sell), which might not be a good option to consider at the moment. Other stocks in the industry worth a look are InvenSense Inc. (INVN) and Gartner Inc. (IT). Both carry a Zacks Rank #2 (Buy). 

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