Lark Research - Alcatel-Lucent Update - Nov. 2, 2009 |
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Alcatel-Lucent reported a third quarter loss of €0.08 ($0.12) per share compared with last year’s loss of €0.02 ($0.02) per share. Adjusted for certain merger related costs, the third quarter loss was €0.06 ($0.09) vs. a profit of €0.02 ($0.03). The earnings were slightly below consensus expectations. Revenues of €3.69 billion ($5.39 billion) were down 9.1% from last year’s third quarter and also down 5.6% sequentially. Revenues were modestly below consensus expectations, but the rate of decline was actually slightly better than the company's major competitors and within its previous guidance of an 8%-12% decline in industry revenues. Weakness in results was driven by the same factors that have hurt the company’s performance over the past year. Customers in both the Carrier and Enterprise segments have cut back spending on major upgrades of their communications networks. Product sales in older, legacy systems, such as 2G wireless and copper-based telephone networks, have dropped sharply. In many cases, the major telecommunications carriers and large corporations have delayed adoption of the latest technology in order to conserve cash. On balance, investors viewed this as a disappointing earnings report for Alcatel-Lucent and its shares fell 11.6% to $3.69 on what was also a very tough day for the broader market. Despite the disappointing results, there were a number of positive developments that may figure in more prominently in the company’s future performance. 1. ALU completed the issuance of €1.0 billion of new convertible debt and repurchased a large amount of two debt issues that are coming due over the next two years. With these steps, the risk of the company not being able to meet its maturing debt obligations has been substantially reduced. 2. ALU generated significant positive cash flow in the quarter, as a result of a significant reduction in inventories and accounts payable. This reverses the outflow trend of the previous few quarters. Since the reduction in working capital is typically a one-time benefit, it is not clear whether this positive performance will continue; but management is focused on generating more cash to reduce debt. 3. Management announced that it has achieved 80% of its goal of reducing annual operating costs by €750 million annually. The benefit from cost cutting helped the Enterprise segment to post near breakeven results this quarter and Application Software to report a small profit. Future quarterly results should show an even greater benefit from cost reduction. 4. The company has announced certain key contract wins, including a converged IP/optical solution for Qwest, an LTE backhaul network for NTT Docomo, and a major application software contract with Singapore’s Nucleus Connect. ALU also announced that it has been selected to participate in 16 LTE trials, including those being run by FT/Orange, Telefonica and Etisalat. Given the tentativeness of the global economic recovery, it is not surprising that the third quarter’s revenues and earnings were modestly disappointing. While cost cutting can take off some of the pressure for now, revenue growth will have to return sometime within the next few quarters to convince the markets that Alcatel-Lucent is on the mend. One major test of Alcatel-Lucent’s resurgence will come later this year when Verizon selects its primary vendor for its LTE network. At a recent investor conference, Verizon CEO Ivan Seidenberg said that he would pick only one vendor for that network, so his choice will likely have significant implications. At this point, ALU rival LM Ericcson is thought to have the better LTE radio stations, but ALU appears to have a significant lead in LTE backhaul networks (and in integrating those networks with other parts of carriers’ network infrastructure). So ALU, which is emphasizing its “end-to’end” LTE capabilities, may have the edge in this "winner-take-all" horse race. But the ultimate contract awards may also depend upon how Verizon frames its purchase decision. To me, Alcatel-Lucent’s turnaround is still on track and so I think that its stock still has significant upside potential. Of course, both the economy and future competition will play a role in determining the strength of its resurgence. Obviously, I would have been happier seeing a stronger third quarter financial performance, but given the economic backdrop, I think that it is prudent to continue to be patient. November 2, 2009 Stephen P. Percoco
Please note: This report and other reports on Alcatel-Lucent in this section on the Lark Research web site have been prepared for potentially interested parties in Lark Research's contract research services. Neither Lark Research nor Stephen P. Percoco have received any remuneration from Alcatel-Lucent for preparing these reports nor do they expect to receive any remuneration from Alcatel-Lucent in the future. |
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