Telecom Lead Europe: Alcatel-Lucent experienced margin woes in Q1 2013 due to limited restructuring progress, but grew sales on the strength of LTE deployments in the U.S.
Alcatel-Lucent’s Q1 results show that while the company achieved revenue growth of 0.6 percent thanks almost entirely to U.S. Tier 1 LTE rollouts, its margins remain depressed.
Alcatel-Lucent’s 29.4 percent gross margin in 1Q13 lagged both Ericsson and NSN by over 250 basis points.
The company expects to reach gross margins of between 35 percent and 37 percent within the next three years, but given ongoing weakness, attaining this goal is becoming more difficult.
Alcatel-Lucent is improving services margins by increasing software sales, consulting engagements and driving the IP division, which garners the highest gross margins, to record revenues.
However, the best margins are typically achieved in the most developed regions and 48 percent of Alcatel-Lucent’s revenues are already concentrated in North America.
The company will continue to grow in the region in 2013, but as AT&T, Verizon, and Sprint wrap up their LTE deployments, growth will be more difficult to achieve starting in 2014.
The U.S. infrastructure market is more competitive than when LTE contracts were first doled out, with Ericsson, NSN, and Samsung all growing their presence in the region.
TBR expects more headcount cuts and a greater push toward the company’s 2015 targets when new CEO Michel Combes announces his strategic plan in June
Michel Combes, Alcatel-Lucent’s new CEO as of April 1, will unveil his three-year vision and strategy for the company in June 2013 following an extensive review of all business lines and organizations and talks with customers and company personnel.
The mobile industry does not expect Combes’ strategy to diverge too significantly from the Performance Program, which was former CEO Ben Verwaayen’s final restructuring effort, but the timetable could be moved up and planned cuts may be deeper than the original goals.
What is unlikely to change is the company’s ambitious financial targets for 2015 as Combes’ incentive pay is tied to meeting these marks. Alcatel-Lucent expects to achieve gross margins of between 35 percent and 37 percent and an adjusted operating margin of between 6 percent and 9 percent by the end of 2015.
Combes will increase the speed in which headcount is reduced and also add to the 5,500 job cuts that are part of the original Performance Program, enabling Alcatel-Lucent to achieve its cost-base reduction targets more easily.
Without additional cuts, the company will have difficulty meeting its 2015 targets. Alcatel-Lucent gave an 18-24 month timetable for divestments following a cash windfall from a bank loan and we expect Combes to keep to that schedule.
If the company is not already, Alcatel-Lucent will actively shop its Enterprise and undersea cable businesses after Combes strategy announcement in June. Due to the cash infusion, however, it is no longer imperative for the company to divest its Enterprise and Submarine businesses in haste.
Michael Soper, Networking & Mobility Analyst, Technology Business Research
[email protected]
