Alcatel-Lucent ( ALU: NYSE)
By MKM Partners ($3.25, Oct. 31, 2014)
We are adjusting our 2014 and 2015 estimates on Alcatel-Lucent
lower and reducing our fair-value estimate to $3.25 from $4.00
based on 0.5 times enterprise value (EV) to our 2015 sales
estimate.
We are maintaining a Neutral rating on Alcatel-Lucent (ticker:
ALU). Revenue for the third quarter came in lighter than expected,
but margins were strong due to continued fixed-cost savings under
the Shift Plan. Even with incremental improvements in operating
performance, the fundamental story for the stock remains
uninspiring.
A global diversified Telecom equipment vendor like
Alcatel-Lucent is largely tethered to the trend in overall
capital-expenditure growth which is flattish. We believe the easy
cost cuts have already been made and revenue upside from here will
be difficult to achieve given competition in Core Networking and
lumpy demand for Access products.
Total third-quarter sales of 3.25 billion euros dipped 1%
quarter-over-quarter, fell 11% year-over-year and were below our
estimate of 3.44 billion euros. Core Networking revenue of 1.44
billion euros were about 20 million euros above our estimate and
Access revenue of 1.81 billion euros missed by about 170 million
euros. Gross margins surpassed our 33% estimate and expanded 240
basis points sequentially to 34%. Operating income grew 34 million
euros quarter-over-quarter to 170 million euros and was 27 million
euros above our estimate. Light revenue more than offset by strong
margins drove earnings per share up sequentially to breakeven, but
still fell short of our estimate of 2 euro cents. Management's
outlook for the fourth quarter calls for normal seasonal revenue
growth in the 10%-15% range.
IP Routing revenue increased 6% quarter-over-quarter as reported
and 4% quarter-over-quarter in constant currency (cc) to EUR594mn.
Strong sales of Core and Edge Routers in Europe, Asia Pacific
(APAC) (excluding China) and Caribbean and Latin America (CALA) was
accompanied by solid order growth in the Americas and Europe, the
Middle East and Africa (EMEA). The company secured four new 7950
XRS IP Core Router contracts in the quarter with CenturyLink (
CTL), China Mobile ( CHL), China Telecom ( CHA) and China Unicom (
CHU). Management also noted that IP Edge Router sales grew faster
than the market and the company exited the quarter with 25% market
share, up 30 basis points year-over-year. These new customer wins
and share gains most likely come at the expense of Juniper Networks
( JNPR) and Cisco Systems ( CSCO).
Terrestrial optics revenue grew at a high single-digit rate
year-over-year driven by increased wavelength division multiplexing
(WDM) portfolio sales in EMEA and APAC. 1830 Photonic Service
Switch sales grew 12% year-over-year and represented 50% of optical
product revenue in the quarter. Year-to-date, 100G deployments
represented 34% of total WDM line card shipments compared to 26% in
third-quarter 2013.
Management delivered an additional 73 million euros in
fixed-cost savings in the third quarter. Operating expenses fell
13% year-over-year pushing operating margin up 200 basis points
year-over-year to 5.2%. The company has cut 310 million euros in
costs this year and plans to cut an additional about 28 million
euros by the end of the year. Cumulative fixed-cost savings to date
are 645 million euros, or close to two-thirds of the 1 billion-euro
2015 target.
Segment operating cash flow was (61 million euros) and free cash
flow was (81 million euros) in the quarter. Excluding restructuring
charges, the company achieved positive free cash flow of 1 million
euros. The company reiterated its commitment to reach
free-cash-flow breakeven in 2015.
-- Michael Genovese
The companies mentioned in Hot Research are subjects of research
reports issued recently by investment firms. Their opinions in no
way represent those of Barrons.com or Dow Jones & Company, Inc.
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