Alcatel-Lucent (ALU, Financial) looks pretty consistent and solid on its shift plan. Its shift or restructuring plan acts as a driving force for Alcatel-Lucent showing growth at a much better rate than anyone expected. The plan focuses on the most profitable products and minimizes costs as well as SG&A expenses. This was reflected in its fourth-quarter results for the fiscal year 2014.
A strong performance
The company reported a net profit of €271 million, a rise of 102% as against €134 million in the same quarter a year ago. Also, its earnings for the quarter increased 60% to $0.08 per share as compared to $0.05 earnings per share last year in the fourth-quarter of 2013. Alcatel’s fixed cost savings for the quarter amounted €30.00 million after reinvesting €16.00 million in projects that could drive its growth in the future.
For the entire year, the company has managed to save €340.00 million in fixed cost savings, which is at the high range of its estimated savings range of €325 to €350. Moreover, it has improved its free cash flow profile and strengthened its organization base. This outstanding effort is able to highlight better its shift plan. This accelerated pace of cost savings should allow the company to invest in projects that are specifically designed to speed up innovation diversification in new market segments and channels.
Better times ahead
Looking ahead, Alcatel-Lucent is in a strong position and remains solid to capitalize on profitable growth opportunities. It is focusing on the operational excellence and quality of service. It expects the investments in its product portfolio and operation to assist the company, reaching positive free cash flow and improve its underlying profitability in 2015. It forecasts revenue of $7.9 million from its core networking with operational margin of 12.5%. This signifies about 18% growth in revenue for the core-networking segment.
Alcatel-Lucent has been witnessing tremendous growth for its IP routings, which contributes more than half of the revenue to its core networking segment. It contributes approximately 20% to the company’s total revenue. IP routing revenue witness a hike of 15% for the quarter. This segment reported revenue of $6.7 billion in fiscal 2014.
Alcatel-Lucent is experiencing significant growth for its 7950 XRS routers. These products are gaining incredible traction for routing mobile and broadband internet markets. The demand for these products is continuously rising especially in China and in the United States. China is engaged in building its 4G networks, while most of the networking companies in the U.S. are upgrading their broadband speed to one gigabit per second.
Alcatel-Lucent has won 36 contract wins for its 7950 XRS routers during fiscal 2014 and four new wins during the fourth-quarter of 2014. Additionally, the company has expanded its product portfolio to rich non-telco space. The company now has hands on Virtual Service Routers or VSR. With this expansion, the company can attract more service providers and large enterprisers to its fold.
VSR will enable these customers to build flexible network and operate service router software on a standard server. Also, the company has launched 7750 SR. This router utilizes its FP3 400G chipset and facilitate high density, high performance aggregation of mobile backhaul, business and residential services. This expansion has made significant contribution to its sales in the fourth-quarter 2014. The non-telco space contributed nearly 15% to its sales in the fourth-quarter 2014 and it expects these products to grow significantly in 2015.
Clearly these are positive moves for Alcatel-Lucent. These products expansion coupled with new contracts wins should enable the company to post higher revenue for its core networking segment in 2015.
In addition, the company is benefiting from its IP transport product profile. Its WDN products are enhancing growth for its IP transport. It saw high single digit growth in its terrestrial optical products across the world. Further, the company remains on track to ramp up the production of its WDN products including 1830 Photonic Service Switch (PSS) platform that should drive its sales and growth in 2015.
Conclusion
Alcatel-Lucent is benefiting from its restructuring plan that should enhance its growth. Also, the continuous focus to reduce its costs, and to concentrate on more profitable products, should drive growth for its top as well as bottom line going forward. The analysts expect its earnings to grow at CAGR of 29.40% this year and 36.40% by next year respectively. This indicates confirm return on the stock in the short-run.
Moreover, the stock is cheap with forward P/E of 12.90 and PEG ratio of 0.72. These metrics reflect better growth for the stock in the future. Its balance sheet carries total cash of $6.33 billion and has a total debt of $6.02 billion. Alcatel-Lucent has operating cash flow of $210.94 million and levered free cash flow of $218.50 million.
