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Shares of Alcatel-Lucent, S.A. (ALU - Analyst Report) fell by more than 4% on May 9 after it reported adjusted net loss from continuing operations of 4 cents per American Depositary Share (ADS) in the first quarter of 2014. However, the reported loss was narrower than the Zacks Consensus Estimate of a loss of 8 cents. In the prior-year quarter, Alcatel had reported a loss per ADS of 19 cents.

The ongoing restructuring of the business, as per the company’s ‘The Shift Plan,’ had an adverse impact on the bottom line. However, growth in IP and LTE technologies due to key contract wins and market share gains partially offset the loss. Also, the gross margin improved due to a favorable product mix and higher profitability.

Total Revenue

In the first quarter of 2014, Alcatel posted revenues of €2,963 million ($4,061 million), up 0.3% year over year but down 20.7% sequentially on a constant currency basis. Revenues fell short of the Zacks Consensus Estimate of $4,354 million.

Revenues by Geography

Geographically, Alcatel reported strong growth in Asia-Pacific, with revenues increasing 19% year over year, driven by rapid network roll-outs in China and increased activity in Japan. However, North America reported a 1.0% decline in revenues, while revenues from Europe and the Rest of World were down 2.5% and 7.0% respectively.

Segmental Performance

Revenues for the Core Networking segment increased 6.9% year over year to €1,352 million ($1852.9 million). Two of the three sub-segments reported year-over-year increase in revenues.

Revenues for the IP Routing division were €549 million ($752.4 million), up 16.4% from the year-ago quarter at constant currency. The double-digit increase in the sub-segment was driven by strong growth in the IP networks industry.

Revenues in the IP Transport division, which includes terrestrial and submarine optics, were €454 million ($622.20 million), reflecting an increase of 8.6% year over year at constant exchange rates due to improvement in the terrestrial optical product businesses.

Revenues in the IP Platforms division declined 6.9% year over year to €349 million ($478.30 million). The decline was due to sluggishness in legacy platforms added to the negative impact of last year’s portfolio rationalization, which completely offset the ongoing growth in the major platforms including IMS voice over LTE (VoLTE), Subscriber Data Management (SDM) and Customer Experience.

Revenue in the Access division declined 4.2% year over year during the quarter to €1,572 million ($2,154.4 million). Two of the four sub-segments, however, reported revenue growth.

Revenues for the Wireless division were €999 million ($1,369.1 million), an increase of 2.3% from the year-ago quarter on a constant currency basis. This was driven by strong growth in LTE across the major regions especially in the U.S. However, the continued declines in 2G and 3G technologies were a partial offset.

Revenues for the Fixed Access division increased 2.8% year over year on a constant currency basis to €460 million ($630.4 million) in the quarter. The copper and fiber businesses continued to benefit from network upgrades to ultra-broadband technologies leading to a strong year-over-year growth rate in the quarter. The positive trends in copper and fiber businesses in the U.S., Europe and Asia-Pacific excluding China continued, while legacy technologies reported declines.

Revenues from the Managed Services division were €99 million ($135.7 million), reflecting a 50.5% decline year over year at constant exchange rate, due to restructuring efforts in this business.

In the first quarter of 2014, the company recorded €14 million ($19.19 million) of Licensing revenues.

During the quarter, revenues for its Other segment were €40 million ($54.82 million), reflecting a decrease of 12% year over year at constant currency exchange rates.

Margins

Gross margin for the quarter was 32.3%, up from 28.2% in the prior-year quarter. The year-over-year increase was driven by favorable product mix and improved profitability in the business.

Cash Flows

Exiting the quarter, free cash flow excluding restructuring charges was a negative €288 million ($394.70 million), narrower than the prior-year’s figure of a negative €445 million ($609.86 million).

Business Update

In the quarter, the company closed the divesture of its LGS business. Also, management received a binding offer from China Huaxin for about 85% stake in its Alcatel-Lucent Enterprise unit. Following the receipt of necessary approvals, the transaction is expected to be closed in the third quarter of 2014.

The Shift Plan

The company is benefiting from its ongoing repositioning as per ‘The Shift Plan’ that was formulated in 2013 to transform itself from being a telecom generalist to a specialist in IP networking and Ulltra-Broadband services. The company now plans to shift focus from the older technologies (2G and 3G wireless equipment) to high potential newer ones like Internet routing. Under this plan, management intends to trim costs by approximately 15% by 2015. 

In the quarter the company achieved fixed cost savings of about €143 million ($196.0 million). As such, the consolidated fixed cost savings under the plan stands at €478 million ($655.1 million).

Presently, Alcatel-Lucent has a Zacks Rank #3 (Hold). Other stocks in the industry worth considering at the moment include Harmonic Inc. (HLIT - Snapshot Report), Premiere Global Services, Inc. (PGI - Snapshot Report) and SeaChange International Inc. (SEAC), each carrying a Zacks Rank #2 (Buy). 

(1€=$1.37048)

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