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Analyst Blog

On Jun 6, 2014, we issued an updated research report on Alcatel-Lucent (ALU - Analyst Report). The company has been receiving a number of new contracts, driven by growth in IP and 4G LTE (Long-Term Evolution) technology. In addition, the company’s Shift Plan is in place and achieving the desired results.

The company had reported first-quarter 2014 results with adjusted net loss from continuing operations of 4 cents per American Depositary Share (ADS), narrower than the loss of 19 cents per ADS in the prior-year quarter. The loss was also narrower than the Zacks Consensus Estimate of 8 cents. In accordance with the Shift Plan, by the end of the quarter, the company had achieved fixed cost savings of about €143 million ($196.0 million).

This Zacks Rank #3 (Hold) company is perfectly positioned to gain from the structurally growing optics and IP markets. The company’s IP Routing and IP Transport businesses remained strong in the quarter. Also, the continuing growth of IP Platform’s IMS voice over LTE (VoLTE), Subscriber Data Management (SDM) divisions benefited the company.

Alcatel Lucent also remains a beneficiary of the significant growth of wireless technologies and smartphones in the emerging markets. The next-generation super-fast LTE and cloud technology has significantly boosted Alcatel Lucent’s performance.           

However, on the downside, Alcatel Lucent’s future growth is dependent upon the continuous deployment of its mobile data and all-IP network transformation technologies. If the emerging markets fail to maintain the current deployment rate of high-speed 3G, next-generation 4G or any hybrid 3G-4G wireless networks, the demand for smartphones will decline, which will negatively affect Alcatel Lucent’s financials. 

Also, the company faces intense competition from companies like Avaya, Cisco Systems Inc. (CSCO - Analyst Report), Ericsson (ERIC - Analyst Report), Fujitsu, Huawei, ZTE and Nokia Corp. (NOK - Analyst Report). Furthermore, in recent years, consolidation has reduced the number of networking equipment vendors, resulting in a smaller but stronger set of competitors.

The company’s financial position has also being impacted by the ongoing restructuring activities. In the reported quarter, the revenues from Alcatel’s Managed Services division were €99 million ($135.7 million), reflecting a 50.5% year-over-year decline at a constant exchange rate, owing to restructuring efforts in this business to cut down the losses. Moreover, the company’s cash is being affected as the complete benefits from the restructuring initiative will only be experienced in the long run.

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