Alcatel-Lucent narrows loss, but U.S. sales drop

Alcatel-Lucent (NYSE: ALU) capped off the second quarter of 2014 with a narrower loss. Yet sales in the United States fell and investors have grown worried that the company's reliance on large contracts from U.S. carriers could hurt it if network activity drops.

In the first six months of 2014, Verizon Communications (NYSE: VZ), AT&T (NYSE: T) and Sprint (NYSE: S) represented respectively 15 percent, 14 percent and 10 percent of Alcatel-Lucent's revenues. In the second quarter, the vendor had sales in the U.S. of $1.89 billion (€1.41 billion), down around 7.6 percent from $2.04 billion (€1.53 billion) in the second quarter of 2013.

BNP Exane Paribas analyst Alexandre Peterc told Reuters the company's overall second-quarter results were in line with forecasts but that there were grounds for concern. "It seems investors are fearing that the U.S. will slow down and that will derail Alcatel despite the good execution of its turnaround," he said.

The vendor also said it is close to regaining full ownership of its patents, which were used as collateral for a loan in 2012, and is also preparing an initial public offering of its submarine networks unit.


"With the upcoming reimbursement of the secured loan and the subsequent recovery of the full ownership of its patents, Alcatel-Lucent recaptures the full control of its destiny and can close the first step of its transformation. The group can now embark on the second chapter of its turnaround story: innovate, transform and grow while keeping intact the commitment of returning to positive free cash flow in 2015," said Michel Combes, company CEO.

Alcatel-Lucent recorded a net loss of $399.26 million (€298 million) during 2014's second quarter, a vast improvement over the year-earlier loss of $1.19 billion, which was due largely to layoff-related restructuring charges during 2013's second quarter.

The infrastructure vendor reported revenues for continuing operations of $4.39 billion, an improvement on a like-for-like basis of 0.7 percent over the prior-year period. However, excluding managed services-- which has been exiting unprofitable contracts--the company said its revenues actually grew 5 percent over 2013's second quarter. That improvement was driven by robust growth in Alcatel-Lucent's wireless business, thanks in large part to LTE rollouts in China and the United States.

In fact, Alcatel-Lucent's "access" unit, which includes its wireless business, experienced a 9.5 percent increase in revenues over the prior-year period, reaching $2.56 billion during 2014's second quarter. Even more impressive, wireless access revenues were $1.74 billion, a 28.1 percent-year-on-year increase. Legacy 2G and 3G technologies continued to see sales declines, and represented less than 25 percent of Alcatel-Lucent's wireless access revenues in the second quarter.

Taking a look at the company's geographical performance, despite strong LTE rollout numbers, overall sales in North America slid 2.6 percent from 2013's second quarter. However, Asia Pacific posted especially positive results with 25.2 percent year-on-year growth, boosted by LTE network rollouts in China. Excluding managed services, Europe showed a 6 percent revenue improvement. Alcatel-Lucent's Middle East and Africa results remained fairly stable, while the Caribbean and Latin America "remained challenging," the company said.

The vendor's managed services revenues were $103.17 million, a slide of 62.8 percent from second-quarter 2013 results, which reflects the company's moves to exit or change loss-making contracts.

Alcatel-Lucent also said its overall gross margin reached 32.6 percent of revenues, a year-on-year improvement of 140 basis points, which the vendor attributed to cost savings. The company has been restructuring its business under CEO Combes' Shift Plan, which includes a focus on IP networking and broadband access as well as massive cutting of fixed costs.

In addition, Alcatel-Lucent is planning an initial public offering for its submarine networks business during the first half of 2015. The vendor will use money raised to strengthen the business and fund its diversification into the oil and gas markets and will retain majority interest in it.

Meanwhile, the vendor has reportedly outsourced all of its 2G and 3G technology efforts to India's HCL. The move is said to be part of Alcatel-Lucent's Shift Plan, unveiled by Combes during June 2013, which aims to help the vendor achieve profitable growth and much-needed liquidity.

Moreover, Alcatel-Lucent has recently entered some high-profile contracts. It is part of AT&T's User-Defined Network Cloud, which seeks to virtualize the operator's architecture so it can deliver rapid, on-demand services to customers. The vendor is also involved in more than 55 network functions virtualization (NFV) projects, including the first deployment of virtualized radio access network (RAN) software at Mobiliy in Saudi Arabia.

In July, Vodafone, as part of its massive Project Sprint network investment effort, made Alcatel-Lucent its supplier of reference for LTE metro cells that come integrated with Wi-Fi. ABI Research recently estimated that Alcatel-Lucent placed first in small cell equipment market share during 2013, ranking above Airvana, Cisco and ip.access.

For more:
- see this Alcatel-Lucent release
- see this Bloomberg article
- see this Reuters article 
- see this ABI release

Special Report: Wireless in the second quarter of 2014

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Phil Goldstein contributed to this article.