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Alcatel-Lucent (ALU - Analyst Report) reported net loss from continuing operations of 80 cents per ADS in the fourth quarter of 2012, worse than the Zacks Consensus Estimate of earnings of 1 cent per ADS. In the prior-year quarter, Alcatel had reported earnings per ADS of 38 cents. Earnings in the reported quarter include an after-tax impact from Purchase price allocation entries.

However, excluding the negative impact of the Purchase price allocation entries, loss per ADS came in at 70 cents compared to earnings of 39 cents per ADS in the prior-year quarter.  

Total Revenue

In the fourth quarter of 2012, Alcatel posted revenues of €4.1 billion ($5.3 billion), down 1.3% year over year but up 13.8% sequentially. The company witnessed marginal improvements in the segment businesses as they reported lower declines during the quarter.

Geographically, North America posted 10% growth. However, Alcatel witnessed mixed trends in Asia Pacific, which resulted in a low double-digit decline. Further, strong performance in Japan was offset by continued low activity in China. Further, cautious spending in Europe, resulted in decline in revenues for the region at low double-digit rate.

Nevertheless, revenues from the Rest of World was comparably better as continued traction in Brazil and Middle East and Africa led to growth, after several quarters of decline.

Segmental Performance

Revenues for the Network segment declined 2.2% to €2.4 billion ($3.1 billion) but increased 10.4% sequentially. Four of the five sub-segments reported year-over-year increase in revenues.

Revenues in the IP division increased a record 26.4% year over year, driven by continuous progression in the Americas and breakthroughs in Japan and China, which resulted in revenue growth in the Asia Pacific region for the quarter.  

The Wireless division reported 2.2% increase after four consecutive quarters of double-digit decline. The Wireline business reported first full year of growth since the merger of Alcatel and Lucent, primarily driven by fiber roll-outs for nationwide broadband initiatives.  

Revenue in the High Leverage Networks grew 7% year over year.  However, the Optics division reported a decline of 22.0% year over year.     

Revenues at the S3 segment (Software, Services and Solutions) grew 5.5% year over year to €1.4 billion ($1.8 billion) and 20.1% sequentially. During the quarter, the division’s Network applications along with its Strategic Industries Services reported strong revenues, which were partially offset by a marginal decline in the Services business segment. At constant currency, S3 revenues increased 3.0% year over year and 22.5% sequentially.

Revenues in the Enterprise business declined 3.7% year over year but increased 10.1% sequentially to €207 million ($266 million) in the fourth quarter 2012.  At constant currency exchange rates, revenues at the Enterprise business segment declined 4.7% year over year but increased 10.1% sequentially.

The year-over-year decline was attributable to stagnant orders. Further, on a geographical basis, the company witnessed declines in Europe that was partially offset by growth in Asia Pacific.

Income & Expenses

Gross margin for the fourth quarter declined approximately 40 basis points (bps) to 30.4% year over year while it expanded 25 bps from 27.9% in the previous quarter. The year-over-year decline was attributable to a lower mix, driven by the decline in CDMA revenues, unfavorable mix in Services and overall lower volumes. The sequential increase in gross margin mainly resulted from higher volumes and product and customer mix, especially in the S3 segment.

Operating expenses during the quarter decreased 1.7% year over year and 3.7% sequentially (constant currency) attributable to the cost reduction plan implemented by Alcatel, primarily focusing on SG&A expenses, which declined 10.1% year over year on constant currency). On a sequential basis, operating expenses increased marginally by 1.5% (constant currency), driven by a 2.3% sequential increase in R&D expense.

Balance Sheet & Cash Flows

Exiting the quarter, Alcatel had a net debt of €126 million ($162 million) versus €84 million as of Sep 30, 2012. The sequential increase in net cash of €210 million ($270 million) primarily reflects positive operating cash flow of €702 million ($902 million). The positive cash flow is primarily attributable to strong positive contribution from the working capital requirements of €259 million ($333 million).

Our Take

Alcatel has been progressing well on its Performance Program that it had announced in Jul 2012. Further, the company is progressing well on its cost control initiatives and has already generated 35% savings or €500 million ($643 million) by the end of 2012.

Moving forward, Alcatel is planning employee retrenchment and exiting of unprofitable partnerships across the globe. According to the company, just 25% of its outsourcing contracts are profitable, which is a pressure on its margins. The company is planning to exit these contracts by the end of fiscal 2013.

Alcatel currently carries a Zacks Rank #5 (Strong Sell) while its peers such as Siemens AG (SI - Analyst Report), LM Ericsson Telephone Company (ERIC - Analyst Report) and Juniper Networks (JNPR - Analyst Report) all carry a Zacks Rank #2 (Buy).

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