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Alcatel Lucent SA (ALU - Analyst Report) reported net loss from continuing operations of €0.09 (11 cents) per ADS in the third quarter of 2013 on Oct 31, wider than the Zacks Consensus Estimate of a loss of 8 cents. In the prior-year quarter, Alcatel had reported earnings per ADS of 6 cents. The quarter’s loss was primarily attributable to increased restructuring charges of €117 million ($155 million) and a financial charge of €218 million ($289 million).  

Although, the company incurred net loss during the quarter, the overall results were encouraging as revenues increased driven by growth in IP and LTE technology. In addition, gross margin also improved due to a favorable product mix and higher volumes. The company’s Performance Program is on target and achieving the desired results. Driven by these factors, the shares price surged from $3.83 on Oct 31 to $4.11 on Nov 5, 2013.

Total Revenue

In the third quarter of 2013, Alcatel posted revenues of €3.7 billion ($4.9 billion), up 7.0% year over year and 3.1% sequentially. Revenues during the quarter were driven by a strong growth in IP revenues, Wireless and fixed networks, partially offset by the company’s outdated technologies.

Revenues by Geography

Geographically, North America posted a 13.6% improvement year over year. However, Alcatel witnessed mixed trends in Asia Pacific, which resulted in a decline of 10.6% year over year. Strong performance and financial stability in China partially offset the continued low volume of activity in the Asia Pacific region. However, Europe reported a 3.1% increase in revenues, while revenues from the Rest of World were down 15.3% as continued traction in Brazil and growth in the Middle East and Africa were more than offset by poor results in Central and Latin America.

Segmental Performance

Revenues for the Core Networking segment increased 0.9% year on year, but declined 4.8% sequentially to €1.5 billion ($2.0 billion). Two of the three sub-segments reported year-over-year decline in revenues.

Revenues for the IP Routing division were €580 million ($768 million), increasing 7.0% from the year-ago quarter and 14.6% at constant currency. The increase was driven by strength in the APAC and EMEA regions, where the latter grew almost 50% compared to the year-ago quarter. Demand for ultra-broadband access technologies, such as LTE, also continued to drive opportunities within IP routing.

Revenues in the IP Transport division, which includes terrestrial and submarine optics, were €544 million ($720 million). The segment witnessed a 1.8% decline year-over-year, but grew 1.8% at constant currency in the quarter. Within IP Transport, growth in the WDM portfolio accelerated, reporting a 10% increase in the quarter at constant rate, led by both the Americas and APAC regions.

Revenues in the IP Platforms division declined 3.6% to €372 million ($493), but increased 1.3% at constant currency compared with the year-ago quarter. During the quarter, the company reported good traction across a number of activities within the Platforms division, particularly Subscriber Data Management businesses. This was driven by the introduction of LTE services; as well as continued momentum in Motive Customer Experience Solutions. This was offset by the de-scoping of certain businesses within this division, consistent with the Shift Plan.

Revenue in the Access division reported 3.7% year-over-year increase in revenues and 7.4% sequential increase to €2.0 billion ($2.6 billion). Three of the four sub-segments reported revenue growth during the quarter.

Revenues for the Wireless division were €1.2 billion ($1.5 billion), an increase of 12.6% from the year-ago quarter due to strong growth in LTE, which in turn was driven by ongoing investments in the U.S. along with positive trends in both the APAC and EMEA regions.

Revenues for the Fixed Networks division were €541 million ($717 million), an increase of 0.7% from the year-ago quarter and 5.8% at constant currency exchange rate. During the quarter, the company reported strong growth in copper and fiber based ultra broadband solutions, mainly in North America and EMEA region.

Revenues from the Managed Services division contracted 28.2% from the year-ago quarter to €186 million ($246 million) as restructuring continued.

Revenues in the Licensing division grew 21.7% year over year to €28 million ($37.1 million), driven by the company’s initiative to use a more offensive approach to monetize its patent portfolio.

During the third quarter of 2013, revenues for Other segment were €228 million ($302 million), reflecting a decrease of 3.4% year over year and a 1.3% increase sequentially. At constant currency exchange rates, other revenues decreased 0.8% year-over-year and decreased 0.4% sequentially.

Margins

Gross margin for the third quarter was 32.6%, up approximately 480 basis points (bps) from 27.6% in the year-ago quarter and increased 70 bps sequentially. The sequential increase in gross margin was driven by higher volumes, favorable product mix and lower fixed operational costs.

Balance Sheet & Cash Flows

Exiting the quarter, Alcatel had a net debt of €1.0 billion ($1.3 billion) versus €794 million as of Jun 30, 2013. The sequential increase in net debt is attributable to higher working capital expenses and restructuring cash outflows.

Free cash flow at the end of the quarter was comparatively better at negative €218 million ($288 million) compared with negative €248 million in the previous-year quarter and negative €366 million in the previous quarter.   

Performance Program

In Jul 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 third quarter 2013, Alcatel achieved €84 million ($1.1 billion) in fixed cost saving. Further, management is continuously repositioning its IP Networking and Ultra-Broadband Access to derive the desired benefits.   

Issuance of New Capital

On Nov 4, Alcatel Lucent announced that it intends to raise approximately $2 billion by issuing new capital and offering high-yield bonds. These are done to primarily repay debt, fund its restructuring activities and strengthen its equity.

According to the announcement, the company plans to raise €955 million ($1.3 billion) from its shareholders by issuing preferential subscription rights to the holders of extra ordinary shares. These shareholders will get one Right for every Existing Ordinary Shares held on the record date of Nov 18, 2013.

The company plans to commence high-yield bonds offering with an aggregate principal amount of $750 million and also plans to execute the new syndicated revolving credit facility of €500 million.

Alcatel currently has a Zacks Rank #3 (Hold). Other companies in the industry worth considering at the moment are ClearOne, Inc. (CLRO - Snapshot Report), EXFO Inc. (EXFO - Snapshot Report) and Vocera Communications, Inc. (VCRA - Snapshot Report). All three carry a Zacks Rank #1 (Strong Buy).

1€= $1.32470

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