Alcatel-Lucent’s sales dropped nearly 6 per cent during Q3, dragged down in part by lighter LTE spending in North America, but a tighter control on costs – courtesy of the firm’s Shift Plan – has widened margins and reduced cash burn.
“Since the launch of the Shift Plan, our primary objective is to enable the company to generate free cash flow on a sustainable, recurring basis, starting in 2015,” said Michel Combes (pictured), Alcatel-Lucent’s chief executive. “Our third quarter results show that we are increasingly improving our underlying profitability, an important step towards this commitment.”
The numbers are indeed encouraging. Gross margin reached 34 per cent of revenues in the quarter, up 210 basis points year-on-year. On a sequential basis, gross margin widened 140 basis points.
And thanks to a 14 per cent trimming of SG&A expenses – read workforce-related costs –adjusted operating income for the period was up more than 50 per cent, to €170 million.
Alcatel-Lucent racked up fixed cost savings of €73 million during the quarter, bringing cumulative fixed cost savings to €645 million under Combes’ stewardship. Under the Shift Plan, a €1 billion cost-saving target has been set over the 2013-15 period.
Cash flow during the quarter improved to minus €81 million from minus €227 million a year earlier. Even better, once restructuring charges are removed, Alcatel-Lucent could boast a positive cash flow, albeit a small one, of €1 million – a marked improvement from the €116 million cash burn in Q3 2013 (on a pro forma basis).
The Franco-US supplier, while showing signs of recovery, is still not out the woods. The firm posted a net loss of €18 million for the quarter, although that was surely more palatable to shareholders than the €200 million splash of red ink in Q3 2013. The improvement was mainly down to lower restructuring costs, a decrease in financial expenses and pension plan amendments
A 5.9 per cent fall in group sales, to €3.25 billion, nonetheless cast a shadow over bottom-line improvements.
North America revenue was hit particularly badly – a 14 per cent year-on-year drop to €1.36 billion – which Alcatel Lucent said reflected a more moderate pace of LTE rollout, as well as a decline in legacy IP transport products.
Europe, too, had a bad top-line quarter with sales falling 13.5 per cent, to €711 million, over the same period. The US-Franco supplier attributed much of the drop to lower managed services revenue.
No wonder, perhaps, that Combes is looking for growth areas beyond the firm’s traditional customer base. “We have opened the second chapter of The Shift Plan,” he declared in a statement, “sharpening our focus on applying innovation to unlock growth in order to address our strategic ambitions within and outside of the telecoms sector.”