Alcatel-Lucent (ALU, Financial) was punished when the company recently reported its second quarter results. Although Alcatel’s losses declined from $0.47 per ADS to $0.14 per ADS, its shares plunged 12.2% due to the softness in the North American market where revenues declined 2.6% year over year. Other details from the report include:
- Group revenues, excluding Managed Services, up 5.0% year-over-year
- Gross margin expanding by 140 basis points year-over-year to 32.6%
- Fixed costs savings of Euro 94 million in Q2 2014, bringing cumulative fixed cost savings of Euro 572 million under The Shift Plan
- Trebling of adjusted operating income to Euro 136 million in Q2 2014 compared to Q2 2013
- Positive segment operating cash flow of Euro 96 million improving by Euro 137 million year-over-year
- Scheduled full reimbursement of senior secured loan in August 2014; release of all pledges on patents
- Intent to explore Alcatel-Lucent Submarine Networks capital opening through IPO in the first half 2015
What's next for Alcatel?
Alcatel-Lucent is focusing on making an attempt to redefine the use of spectrum. Qualcomm (QCOM, Financial) had made a $130 million investment in Alcatel last year to develop products together for the small-cell base station market. Alcatel and Qualcomm are jointly building multimode cells that would connect to the Alcatel-Lucent radio access network and small cell chips from Qualcomm.
For instance, Alcatel-Lucent's lightRadio technology uses cell towers to provide mobile broadband, thereby removing cars from the crowded spectrum interstate. This technology will help optimize networks by not only reducing the company’s overhead, but also increasing its network speed. While Alcatel-Lucent provides the hardware, the device that consolidates and redistributes the capabilities of a cell tower, Qualcomm, being the world leader in wireless solutions, would create the network by using different kinds of small cells that serve purposes like range expansion, voice capabilities, transferring data, etc., to enhance lightRadio.
Investment in small cell technology
Small cell technology will drive Alcatel's business. This is indicative from Alcatel’s connections with companies like Qualcomm, Sprint (S, Financial), and AT&T (T, Financial). Small cells are low-powered cells featuring a tight range that operates on licensed and unlicensed spectrums. This technology is developed to tackle the rise in data consumption and demand.
LTE-based small cells are driving revenue growth per user within the femtocell market. All of this is credited to the transition of the telecommunications industry into small chips, which have helped increase their demand. Also, the multimode chips are ready to enter the market very soon this year. All in all, small cells are the "it" product in cellular network infrastructure, and will play a crucial role in delivering mobile data.
Alcatel can’t get through this market easily without facing tough competition. Ericsson (ERIC, Financial) is the company that dominates the small cell and femtocell markets. Ericsson recently launched its Radio Dot system, which allows mobile operators to deliver consistently high performance voice and data coverage and capacity in the widest range of enterprise buildings and public venues. The company registered Vodafone (VOD, Financial) as its first customer.
Product-driven growth
However, Alcatel is finding success in the core router business. The company is delivering products to address heavy traffic between networks, giving tough competition to Cisco (CSCO, Financial) and Juniper (JNPR, Financial), both of which had dominated this industry for so long.
Another positive for Alcatel is its investment in EBlink that will solidify the company’s LTE portfolio. EBlink can transfer high rates of data over the wireless network without the use of fiber wire. It claims that it can provide 7 Gbps over a wireless link by using a bandwidth of 100 MHz. With the fronthaul framework of EBlink, the company will also save costs over fiber wire by using wireless equipment and also save on set-up costs.
Alcatel’s Shift restructuring plan, since its launch last year, is working well and has helped decrease its operating expenses and improve the balance sheet. This program aims to improve the company’s profitability and get rid of unnecessary assets. This will provide the company with $1.36 billion from asset disposals. The Shift Plan is aimed at transforming the company from a telecom generalist to a specialist in IP networking and Ultra-Broadband services.
Conclusion
Alcatel's recent results were weak, but the company is adopting impressive strategies to improve its performance. It has paired up with key players such as Qualcomm, and also has important customers such as Vodafone. As a result, investors should not read too much into Alcatel's recent results, and instead focus on its long-term prospects.
