Sputtering Earnings at Alcatel-Lucent Reflect a Difficult Network Infrastructure Market

Slowing demand for wireless infrastructure products took a toll on first-quarter revenue at Alcatel-Lucent (ALU), but executives remain optimistic that company will regain its footing after a temporary lull — which they also attributed to a companywide restructuring.  The company posted a €73 million loss in the first three months of the year, compared with a €353 million loss in the same period in 2013. ALU benefited from continuing cost-cutting, which is expected to total €1 billion by the end of next year.   Alcatel-Lucent is undergoing a major restructuring that includes cutting an estimated 10,000 jobs worldwide.  

Commenting on the earnings report, ALU CEO Michel Combes said:

“We began 2014 as we ended 2013 — totally focused on driving implementation of The Shift Plan. Having put the Group in the right financial direction last year we are encouraged by the continued progress shown in the first quarter of 2014. This confirms the industrial logic of the strategic choices we have made and provides a good start on which to build during the rest of 2014 as we work towards our objective of bringing the Group as a whole back to positive free cash flow by 2015.

ALU may have overextended itself by “trying to do too many things,” it will establish a solid competitive foundation by redoubling its efforts in technologies such as ultra-broadband access, virtualization and the cloud. 

The company said that “traction around our IP mobile packet core solutions” is particularly strong, and that the 7950 XRS IP Core router attracted four new deals during the quarter, including contracts with cable operators, one of the target markets identified by the CEO.  

ALU claims they’ve sustained their strong position in IP edge routing (#2 ranking).  Further expansion in IP core, Enhanced Packet Core (EPC) for LTE and data centers took place in 2013.  The IP router division (with the above three components) has attained double digit growth the last three years.  

Mt View, CA based Nuage Networks- a wholly owned ALU subsidiary- is part of their IP router division. Nuage had three customer wins in 2013 and is involved in 20+ trials.  From the earnings call transcripti: “Our Nuage venture kept up momentum and added two new commercial wins during the quarter, including the recently announced Numergy, which brings the total to date to five.”

In the transport equipment business, the network equipment vendor noted that “terrestrial optics recorded its first quarter of year-over-year growth since 2011,” driven by 26 new deals for the 1830 Photonic Service Switch (PSS), while 100G shipments represented 30% of total WDM line cards shipments in the quarter, compared with 19% a year ago. Alcatel-Lucent is also engaged in two new 400G OTN trials, with Ontario Research and Innovation Optical Network (ORION) and Telekom Austria AG (NYSE: TKA; Vienna: TKA).

IP Platforms, which includes the company’s Network Function Virtualization (NFV) and cloud systems, recorded an increase in revenues from IMS (VoLTE), SDM (Subscriber Data Management) and Customer Experience (Motive) systems, but revenues were down due to declining sales of legacy platforms and “portfolio rationalization.”

In the Access business, Alcatel-Lucent says 4G/LTE revenues improved, driven by sales in the US, but 2G and 3G (which combined represent less than 25% of wireless access sales) were down. In fixed access, FTTX and VDSL2 sales are improving, and discussions with operators about the potential of G.fast (vectored DSL) have begun. A decline in legacy system sales countered those gains, though. (SeeTelekom Austria Tests G.fast.)

One of the most important events for Alcatel-Lucent during the first quarter was that it received a binding offer from China Huaxin for 85 percent of its Enterprise business unit, which makes IP telephony and Ethernet switching equipment. The deal values the unit at a!268 million, and is expected to close during the third quarter, Alcatel-Lucent said.

IP routing was the best-performing product category. Revenue from fixed access, wireless access and IP transport products also increased, while managed services struggled. The best-performing region was Asia Pacific, where sales grew by 19 percent, while sales in all other regions dropped.

On May 8th, Japanese wireless network operator NTT DoCoMo announced that Alcatel-Lucent was one of six vendors with which it will conduct experimental trials of emerging “5G” technologies (which have not been standardized yet). NTT doesn’t expect to have a 5G cellular system ready for commercial deployment until 2020, but it’s important for Alcatel-Lucent to get a foot in to secure its long-term prospects.

Alcatel-Lucent wasn’t the only networking equipment vendor that saw its quarter-on-quarter results worsen. It is suffering from the same malaise as other network infrastructure vendors, according to Mark Newman, chief research officer at Informa Telecoms & Media. Investments in wireless networks have trailed off, and because Alcatel-Lucent is in the middle of a reorganization it is more vulnerable than some competitors, Newman said.

Telecom infrastructure companies like ALU as well as Ericsson and Nokia (formerly Nokia-Siemens) are facing competition from fast-growing Chinese rivals like Huawei and ZTE.  Those and other Chinese rivals are competing for lucrative contracts, particularly in emerging markets in Latin America and Asia.  Network equipment vendors also are struggling to persuade many of their customers, which are primarily the world’s cellphone operators, to buy new networking equipment and increase the sector’s already large debt burden.  It is not a pretty picture. 

“We expect Alcatel-Lucent to show further improvement in profitability through the course of the year,” analysts at Liberum Capital in London told investors in a research note on Friday, May 9th.




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