Chinese LTE a highlight for ALU's Q2

Investors pleased with improvement in operating margins while CEO Combes says Shift Plan on track

By Caroline Gabriel

China, now the world's largest mobile market, looms large in every vendor's results this quarter. Rising competition from Chinese suppliers is really starting to be felt in smartphones, but in infrastructure, the major players have largely adjusted - however painfully - to their new competitive landscape, and the massive presence of Huawei. Alcatel-Lucent has suffered for years from those new rivalries, but in its second quarter, it showed how Chinese growth is also an opportunity. Its highlight was better than expected performance in wireless equipment, particularly driven by Chinese sales, and somewhat offsetting some disappointments in its crown jewel, the core router business.

CEO Michel Combes said his 'Shift Plan' - the last and most promising of a series of turnaround programs at ALU since its troubled merger - was on track and reiterated his goal of achieving positive free cashflow by the end of 2015. The most positive metric for investors was the improved operating margin, up to 4.1%, from 1.3% in the year-ago quarter.

Revenue was up just 0.7% year-on-year to €3.28bn, in line with analyst predictions but well below growth at Ericsson (5%) and Huawei (but better than Nokia's 8% top line drop). Core operating profit tripled to €136m, well ahead of forecasts, and gross margin rose from 31.2% to 32.6%.

Combes also said he was continuing a key aspect of the Shift Plan, divesting non-core assets, and will seek an IPO of the submarine cable unit in the first half of next year.

The ongoing cost cutting program, which has been intensified since Combes took over from predecessor Ben Verwaayen, helped boost the operating margin, as did strong LTE sales in China and the US. But the costs of the restructuring kept ALU firmly in the red, with a net loss of €298m. This was, however, much reduced from the year-ago figure of €885m. ALU has failed to post more than one-off quarterly profits since its creation in 2006, and Combes is addressing the challenge with promises to cut 10,000 jobs and €1bn in costs, as well as to offload a further €1bn in assets.

That will see ALU focusing its business on a narrower range of activities, with converged IP networking and cloud platforms as the main growth engines. Unlike rival Nokia, which is focusing entirely on mobile broadband, ALU has designated mobile-only networks mainly as a cash generator, and is integrating its LTE activities with fixed IP. It recently decided to outsource R&D in 2G and 3G technologies, reserving its inhouse investments, and its famous Bell Labs, for 4G and beyond.

Meanwhile, core and edge routers are increasingly its most important business, and some analysts say the router unit would be worth more, on its own, than ALU is now. However, in Q2 some analysts had looked for more growth there, and for once, LTE was the highlight.

In the Q4 earnings call, Combes said: "This fourth consecutive quarter of consistent execution has enabled us to close the first chapter of the Shift turnaround plan."

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