Alcatel-Lucent (ALU) reported net earnings from continuing operations of €0.01 per share or 2 cents per share in the third quarter of 2010, ahead of the Zacks Consensus Estimate of break-even. The company had reported net loss per share of €0.08 or 12 cents in the third quarter of 2009.

During the quarter, the company was successful in converting its top-line growth into profit and cash flow through its operating efficiency and focus on reducing organizational complexity.

Total Revenue

Strong customer base and continued market share gain of Alcatel-Lucent’s next generation products increased total revenue by 10.5% year over year to €4.1 billion. In terms of dollar, revenue in the quarter was approximately $5.25 billion, above the Zacks Consensus Estimate of $5.07 billion. Excluding the effect of currency fluctuations, revenue was up 2.9%

Geographically, North America experienced revenue growth of 21.6% and Asia-Pacific witnessed a growth of 18.3%. Though revenue in Europe declined by 0.2%, it was up by mid single digit points in Eastern Europe. Rest of the World revenue was down by 1.2%. The company saw a strong growth in India and Russia and also witnessed a recovery in China.

Segmental Performance

Networks revenue increased by 10.2% year over year to €2.5 billion, whereas Application revenue increased by 5.5% to €499 million and Services revenue increased by 9.1% to €948 million.

In Networks segment, though the revenue from IP division increased by 29.3% and Wireless division by 24.2%, this was offset by a 7.8% decline in revenue from Optics division and a 2.0% decrease in Wireline division. The segments’ adjusted operating margin was 1.3% compared with -1.2% in the third quarter of 2009.

Within the Application segment, Network Application revenue increased 3.5% while Enterprise Application showed a continued sign of recovery with revenue increasing by 7.2%. The segment’s operating margin was 3% compared with break-even adjusted operating income in the prior-year period, primarily driven by strong contributions from Enterprise business.

Within the Service segment, managed and outsourcing solutions revenue increased at a double digit rate, led by new contracts and existing project development, mainly in EMEA and Asia-Pacific regions. Network Build and Implementation business also witnessed a double digit growth, led by growth in EMEA and the Americas. The segments operating margin was 3.0% versus 4.4% in the prior-year period.

Income & Expenses

Adjusted operating income for the quarter was €61 million (1.5% of revenue). The positive product/geographic mix and Alcatel’s initiatives on fixed cost operations resulted in 40 basis points year over year increase in gross margin to 33.8%.

Moreover, operating expenses declined by 0.7% on a constant currency basis, but increased by 5.9% on reported basis. Sequentially, operating expenses declined by 0.2% on a constant currency basis and by 2.4% on a reported basis resulting from lower SG&A expenses.

Balance Sheet & Cash Flows

At the end of the quarter, Alcatel-Lucent had net debt of €190 million compared with net cash of €107 million at the end of the second quarter. The company’s positive operating cash flow of €193 million was more than offset by cash spending of €73 million for restructuring, €56 million in contribution to pensions and OPEB and €184 million of capital expenditure.

Outlook

Alcatel reiterated its outlook for 2010, and expects a nominal growth (i.e. 0% to 5%) for the telecommunications equipment and related services market. For 2010, Alcatel-Lucent expects adjusted operating margin to be in the range of low to mid single-digit (i.e. 1% to 5%).

We are encouraged by the continued progress in cost management highlighted by the year-over-year increase of gross margin and continued decrease in operating expenses. With strengthening demand in some segments and geographical areas, we expect the company to deliver strong results in top line and operating income levels ahead.

Based in Paris, Alcatel-Lucent is a diversified global manufacturer of telecom equipment with over 77,000 employees in 130 countries worldwide. Apart from being the world’s leading supplier of digital subscriber line (DSL) equipment, Alcatel-Lucent is among the leaders in telephone switching equipment, optical and data networking gear, mobile infrastructure, and communications software.

The company has also been a big player in mobile handsets, fiber optic cable, and Internet routers. Major competitors of Alcatel-Lucent are Cisco Systems Inc. (CSCO) and LM Ericsson Telephone Co. (ERIC).

We currently maintain our Neutral rating for the long term on Alcatel-Lucent, with a Zacks #2 Rank (short-term Buy recommendation) over the next one-to-three months.

 
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