Technology Stocks : Alcatel-Lucent (ALU)

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From: Sam2/13/2012 11:49:43 PM
   of 176
Alcatel Soars 13% On Q4 Beat; Restructuring Bears Fruit
February 10, 2012, 2:02 P.M. ET
By Tiernan Ray

Shares of Alcatel-Lucent ( ALU) are up 25 cents, or 13%, at $2.19 after the company this morning reported Q4 revenue and earnings per share ahead of the consensus and said it may slash as many as 1,800 jobs in a reorganization of its European workforce.

Revenue in the three months ended in December fell 11%, year over year, but rose 9.5% from Q3's level to €4.26 billion, which in U.S. dollars comes out to $5.52 billion, beating the average $5.44 billion estimate. EPS of €0.19 beat the average €0.05 estimate, or $0.25 versus $0.07 in U.S. dollar terms.

The company generated €541 million in free cash flow in the quarter.

Separately, the company said it plans a reorganization in Europe that may cut 1,800 positions from its 25,000-person workforce, as reported by The Wall Street Journal’s Max Colchester and Nadya Masidlover.

In a separate release, the company said it would form a licensing “syndicate” to make money off its 29,000 patents.

RBC Capital’s Mark Sue reiterated a Sector Perform rating on the shares and a $2.50 price target. The restructuring efforts so far have already borne fruit, he observes.

It’s been inconsistent, yet ongoing restructuring efforts are having some effect as Alcatel posted its first annual profit since its merger back in 2006. Alcatel eliminated over €300M in annualized fixed cost savings in the quarter and reiterated its 2012 target of an additional €500M in cost reductions as it strives for normalcy. Concerns around cash flow may be moderating given the strong FCF generation of €541M following last quarter’s (€436M). Improved working capital management, specifically a €272M decline in net inventories, drove the improvement.

Michael Genovese of MKM Partners reiterates a Neutral rating on the stock.

The company’s networking business was a mixed bag:

Overall Networks segment revenues increased 8% sequentially. Wireless revenues declined 14% q/q, despite increases in Europe and Asia Pacific, due to a large drop in the Americas. Wireline revenues came in up 36% sequentially, driven by fiber access in China. Optics revenues were up 24% q/q and were strong in the Americas and Europe. This is yet another near-term positive data point for Optical demand.

And Adnaan Ahmad with Berenberg Bank today reiterates a Sell rating on the shares, writing that although the results “on a headline level (as always with Alcatel-Lucent) were robust,” nevertheless, “they may not be as good as meets the eye!”

Underlying operating margins were at 3.4% for 2011 when you exclude Genesys’s 30% EBIT margin structure versus the 3.9% “adjusted” number published, and if you put that in context versus the 4.5% street consensus for 2012, it seems that numbers have to actually come down even though the company has guided for operating margins to be higher than 2011 (3.4% or 3.9%, Mr Tufano (CFO)?).

As regards the patent licensing, “The CFO was cited “more than a few hundred million” in value terms from this deal,” but Ahmad writes that he would have liked to get “an understanding on whether this is a lump-sum, royalty-based, recurring-or-not revenue-and-income profile.”

Correction: A prior version of this post cited an incorrect amount of the earnings per share reported by Alcatel in Q4. The company turned in €0.19 per share, or $0.25 in U.S. dollar terms. My apologies for any confusion caused by the error.
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