Alcatel-Lucent boosts profit in Q4 but sees N. American sales dip 11%

Alcatel-Lucent (NYSE: ALU) posted higher profit in the fourth quarter of 2014 and vowed to continue its march into profitability in 2015. However, like its larger peer Ericsson (NASDAQ: ERIC), Alcatel-Lucent was stung in the fourth quarter by falling sales in North America, which is especially problematic since Alcatel-Lucent relies heavily on U.S. carriers for its overall sales.

Overall, Alcatel-Lucent said its fourth-quarter operating profit was $325 million (€284 million), down from $335 million a year ago and missing the $348 million analysts had predicted, according to Bloomberg. However, the company's net income more than doubled year-over-year to $310 million.

Alcatel-Lucent's closely watched gross margin, which is revenue minus production costs, will be 34 percent of sales or "slightly more" in 2015, CEO Michel Combes said during a conference call to discuss the company's results, according to Bloomberg. The company posted a gross margin of 34.7 percent in the fourth quarter, and analysts had projected the figure would be 33.8 percent for this year.

The Franco-American vendor's total sales fell 6 percent to around $4.2 billion, in line with expectations, according to Reuters. Alcatel-Lucent's wireless division, which is its single largest by sales, saw revenue drop 9 percent year-over-year to around $1.39 billion.

However, in a troubling sign, the company saw its sales in North American drop 11 percent from the year-ago period to around $1.7 billion. Alcatel-Lucent said that in North America it had "notable growth" in IP Routing and IP Transport, which was offset by lower revenues from IP Platforms and from the Access segment, which includes its wireless business.

Like Ericsson, which saw its North American sales dip 5 percent in the fourth quarter, Alcatel-Lucent has seen sales in the region fall off after Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE:T) finished their macro LTE buildouts. The U.S. market is "healthy," Combes said, according to Bloomberg.

Alcatel-Lucent leans heavily on its U.S. customer base for sales. In 2014, Verizon, AT&T and Sprint (NYSE: S) represented, respectively, 14 percent, 11 percent and 10 percent of Alcatel-Lucent's revenues (it was, respectively, 12 percent, 11 percent and 10 percent in 2013). However, the company said it continued to diversify its LTE customer base in the fourth quarter, with 11 new wins in the period.

By contrast, Nokia (NYSE:NOK) saw sales in its Networks business jump 95 percent in the fourth quarter. In the U.S., Nokia, Alcatel-Lucent and Samsung are providing 8T8R radios for Sprint's tri-band Spark LTE service. That project is continuing through at least 2015. Meanwhile, Nokia is also helping T-Mobile US (NYSE:TMUS) enhance its LTE network and implement carrier aggregation as well as expand LTE network coverage.

"There's still room for improvement in our gross margin, even more than we were initially expecting," Combes said. "Looking at 2015, we are in a perfect position to drive profitable growth."

Combes' confidence about profitability is partly due to the massive cost-cutting efforts he has undertaken with his "Shift Plan." The goal of the program is to return the company to positive cash flow in 2015. Under the program, Alcatel-Lucent has focused on IP networking, broadband access, LTE and small cells, as well massive cutting of fixed costs and around 10,000 jobs. The company has also exited unprofitable managed services deals and sold assets worth around $687 million. It also plans an initial public offering of its submarine cable business sometime in the second half of 2015.

For more:
- see this release
- see this report (PDF)
- see this Bloomberg article
- see this Reuters article
- see this WSJ article (sub. req.)

Special Report: Wireless in the fourth quarter of 2014

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