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Alcatel Lucent Soci (ALU - Analyst Report) reported a modest fourth-quarter and strong full-year 2013, after struggling for almost two years to transform itself into a profitable company.

For the fourth quarter, the company reported adjusted earnings of €0.06 per diluted share ($ 0.08) per ADS, which includes restructuring charges of Euro (105) million, a net financial loss of Euro (161) million, an adjusted tax benefit of Euro 79 million, and non- controlling interest of Euro (22) million. Adjusted earnings surpassed the Zacks Consensus Estimate of a loss of 1 cent.

The company reported earnings (excluding one-time items) of €0.12 (17 cents) per ADS which was also well above the Zacks Consensus Estimate of a loss of 1 cent. 

Moreover, overall the results were encouraging as driven by growth in IP and LTE technologies due to key contract wins and market share gains. In addition, gross margin also improved due to a favorable product mix and higher volumes. The company’s Performance Program is on target and is achieving the desired results. Finally, Alcatel Lucent has succeeded in repositioning and establishing itself as the specialist of IP and Cloud networking, ultra broadband fixed and mobile access.

Total Revenue

In the fourth quarter of 2013, Alcatel posted revenues of €3.9 billion ($5.4 billion), which were flat year over year but up 8.8% sequentially. Revenues fell short of the Zacks Consensus Estimate of $5.7 billion.

Revenues by Geography

Geographically, North America posted a 1.9% improvement year over year. However, Alcatel reported strong growth in Asia Pacific, with revenues increasing 10.2% year over year, driven by strong network roll-outs in China. However, Europe reported 0.1% decline in revenues, while revenues from the Rest of World were down 16.5%.

Segmental Performance

Revenues for the Core Networking segment decreased 7.4% year on year, but increased 14.7% sequentially to €1.72 million ($2.36 million). Two of the three sub-segments reported year-over-year decline in revenues.

Revenues for the IP Routing division were €555 million ($764 million), declining 5.2% from the year-ago quarter and 2.6% sequentially, at constant currency. For fiscal 2013, sales grew 10.3% at constant exchange rates, reflecting a consecutive double-digit increase for the third year, driven by demand for ultra-broadband access technologies, such as LTE, that drove opportunities within mobile backhaul deployments.

Revenues in the IP Transport division, which includes terrestrial and submarine optics, were €544 million ($720 million). However, for the full year, revenues declined by 8.8% year over year at constant exchange rates due to stabilization in the second half as a result of improving mix within IP Transport throughout the year.

Revenues in the IP Platforms division declined 5.8% to €543 million ($748) year over year. However, for the full year, revenues surged 6.2% year over year at constant exchange rates due to good performance across a number of activities, specially the IMS and Subscriber Data Management businesses, growing at a combined 15% rate, driven by the rollout of LTE networks and Voice over LTE (VoLTE) technology.

Revenue in the Access division grew 4.2% year over year during the fourth quarter and increased 3.5% sequentially to €1.98 million ($2.73 million). Two of the four sub-segments reported revenue growth during the quarter.

Revenues for the Wireless division were €1.2 million ($1.71 million), an increase of 15.0% from the year-ago quarter due to strong growth in LTE, which in turn was driven by ongoing large deployments in the U.S. and China.

For 2013, the division reported a double-digit increase in revenues, with LTE enjoying more than 70% growth year-over-year and the company’s overlay strategy showing continued success, driven by recent contract wins from China Telecom, Setar in Aruba, YooMee in Africa, Lazus in Colombia and Osnova in Russia. Nevertheless, this performance was partially offset by continued declines in 2G and 3G technologies, particularly CDMA which represented less than 15% of wireless revenues in the fourth quarter.

Revenues for the Fixed Access division increased 2.4% year over year and 1.7% sequentially to €542 million ($747 million) in the fourth quarter of 2013. The copper and fiber businesses continued to benefit from network upgrades to ultra-broadband technologies leading to strong year-over-year double-digit growth rates in the fourth quarter. In 2013, this division grew at a mid-single digit, further emphasizing positive trends in copper and fiber businesses, notably in the U.S. and Europe, while legacy technologies reported declines.

Revenues from the Managed Services division were €186 million ($256 million), reflecting a 30.1% decline year over year at constant exchange rate, due to restructuring efforts in this business.

In the fourth quarter of 2013, the company recorded €15 million ($20.7 million) of Licensing revenues and € 27 million ($37.2 million) of Intellectual Property disposals.

During the fourth quarter of 2013, revenues for its Other segment were €232 million ($319.7 million), reflecting a decrease of 8.5% year over year but a 2.6% increase sequentially, at constant currency exchange rates.

Margins

Gross margin for the fourth quarter was 3.4.3%, up approximately 400 basis points (bps) year over year and increased 170 bps sequentially. The year-over-year increase was driven by favorable product mix, operational improvements and reduced fixed operations costs, while the sequential improvement mainly reflects reduced operational costs. Full-year gross margin was 32.2%, improving by 220 bps compared to the prior year.

Cash Flows

Exiting the quarter, free cash flow was €363 million ($500 million) excluding restructuring charges. Free cash flow improved by €119 million ($1645 million).

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 fourth quarter of 2013, Alcatel achieved €104 million ($143 million) through fixed cost saving. For 2013, the company generated savings of €363 million ($482.1 million). Further, management is continuously repositioning its IP Networking and Ultra-Broadband Access to derive the desired benefits.   

Divestitures

Before the company ended 2013, Alcatel Lucent entered an agreement for the sale of LGS for approximately $ 200 million. This apart, following the earnings release, Alcatel Lucent mentioned that it has received a binding offer from a Chinese technology investment company, China Huaxin for the 85% acquisition of Alcatel-Lucent Enterprise.

The transaction is valued at €268 million ($356 million) on an enterprise value basis (cash-free / debt-free) and is estimated €237 million ($314.8 million) on an equity value basis (100%). However, Alcatel-Lucent will retain a minority stake of 15% and the deal is expected to be signed during the second quarter of 2014.

Alcatel currently carries a Zacks Rank #4 (Sell). Other companies in the industry worth considering at the moment are AudioCodes Ltd. (AUDC - Snapshot Report), Westell Technologies Inc. and Plantronics, Inc. (PLT - Snapshot Report). While AudioCodes and Westell Carry a Zacks Rank #1 (Strong Buy) Plantronics holds a Zacks Rank #2 (Buy).

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