Telecommunications equipment company Alcatel-Lucent (ALU, Financial) has been gradually moving out of the woods ever since it moved ahead with its restructuring plans under the “Shift Plan” instituted in 2013. This plan was put in place in an attempt to transform itself from a telecom generalist to a specialist in IP networking and Ultra-Broadband services. Shares of the company surged a whopping 16% after it came up with an impressive third-quarter results on Oct 30.
A look at the latest performance
The company posted breakeven results, thrashing consensus estimates of a loss of $0.02 per share and also representing a huge jump over the loss of $0.10 per share in the year-ago quarter. However, it lagged consensus estimates on revenue that came in at €3,254 million, marking a year-over-year decline of 5.9% and a sequential decline of 3.3%.
The revenue decline was primarily due to softness in North American and European markets where revenue declined 14% and 13.5% year over year, respectively. However, the company continues to witness strong growth in the APAC region, which grew 22.5% year over year. This was largely on the back of rapid network rollouts in China and a good momentum in Japan and Australia.
However, despite lower revenue, the company continued to demonstrate solid profitability improvements, which is the key measure of its turnaround success. Gross margin improved by 2 percentage points to clock 34% on the back of a better mix and improved profitability in several business lines. Adjusted operating income moved up by 200 basis points to clock €170 million, translating into a margin of 5.2%.
On a year-to-date basis, despite revenue being 0.5 billion lower than the year-ago comparable period, the company delivered an increase in adjusted operating income of €360 million. The key contributor to this improvement is obviously fixed cost savings. Having achieved more than two-thirds of the “Shift Plan” target, the company is very confident of achieving its €950 million goal by 2015.
Gaining momentum
The company is seeing good traction for its products and services. Four new contracts were added in IP core during the quarter, bringing the total year to date to 32 new wins. WDM share progressed further with new customers for 1830 platform. There’s continued activity in the Cloud and virtualization segments also. In particular Nuage added four new customers, and Alcatel now has 12 customers who are deploying SDN.
Moreover, in fixed line services, besides adding new VDSL2 vectoring customers, the company won two awards at the Broadband World Forum –Â one for the best fixed broadband innovation and the other for most innovative service provider with VDSL2 vectoring. Also, the company registered five new wins in LTE overlay.
Conclusion
Looking forward, Alcatel-Lucent is on the right track and is confident of succeeding in its transformation plan. The company reiterated its commitment to be free cash flow positive in fiscal 2015. The focus, as per “Shift Plan,” has always been less on revenue growth and more on underlying profitability. As CEO Michel Combs said, “…I have always said that I would not bet on revenue growth and that I would reduce the cost to operate in order to improve the gross margin and to make sure that we deliver our target whatever the environment that we would face.”
