Source: Seeking Alpha
Alcatel-Lucent SA (NYSE:ALU)
Q2 2014 Results Earnings Conference Call
July 31, 2014; 07:00 a.m. ET
Michel Combes – Chief Executive Officer
Jean Raby – Chief Financial Officer
Ehud Gelblum – Citigroup
Gareth Jenkins – UBS
Achal Sultania – Credit Suisse
Alexander Peterc – Exane BNP Paribas
Sandeep Deshpande – JPMorgan
Francois Meunier – Morgan Stanley
Stuart Jeffrey – Nomura
Welcome to the Alcatel Lucent press and analyst conference. We leave the floor to Michel Combes.
Michel Combes – Chief Executive Officer
Okay. Good morning and good afternoon to everyone. Thank you for joining us on the call to discuss Alcatel Lucent’s Q2 and H1, 2014 results. As usual, I will start by presenting an overview of our results and our activity before handing over to Jean Raby for a detailed financial review.
Let me start with some introductory remarks on the key developments we observed during Q2 and the first half of the year. First, from a near term market standpoint, we saw operators intensifying their focus on wireless access, pushed by LTE deployments. We perceived this on a broad base, although with somewhat more vigor in North America and in China.
This movement has clearly favored our access segment, notably our wireless access business, which recorded both year-on-year and quarter-on-quarter growth in the neighborhood of 30% in Q2. Such an increase was fueled by coverage and capacity projects.
More specifically in LTE and Small Cells, the two areas where we decided to place our bets, our revenues more than doubled over the first half, while almost tripling in Q2 alone. Meanwhile, demand for high broadband access also led our fixed business to enjoy a solid quarter in revenues and in profitability.
On the other hand, revenue performance in core networking was a bit more mixed. IP routing was down 7% on a very high conversion basis, which I had flagged on various occasions. I will repeat what I say every quarter, namely that one should not over read a single quarter performance, given the viability we may and have already experienced.
To put things into context, Q2, 2014 stands among the top three quarters in routing revenue history. Performance in IT transport and platforms, with revenues also down year-over-year was to a large extent a function of continued transition of the business mix from Legacy to new generation of products and technologies and which by the way end up in an improvement of the profitability of this segment.
The key item I want to stress is profitability. While business mix was skewed towards access in Q2, profitability continued to improve significantly and this is really what I have focused on. This is essentially the result of our relentless focus on costs. At the end of Q2 we have achieved close to 60% of our fixed cost saving targets and our operating income was multiplied by three to EUR136 million.
It is also important to mention that while there may be some temporary movements in operators spending, underlying market fundamentals remain intact. It is our belief that the current spin towards wireless can only be temporary and cannot go without investments in backhaul and core, as the same long term dynamics remains in play, namely the data traffic tsunami if I may call it that way.
To be absolutely 100% clear, I reiterate our EUR7 billion target for core network revenue in 2015 and operating margin of 12.5%, compared to an operating margin for the segment in H1 2014 of 8% and an operating margin for the very same segment in H1 2013 of 4.3%. So we have a sequence which drives us without any issue to the 12.5% that I have mentioned.
Moving to the next slide, this is the fourth quarter since we announced The Shift Plan and this is now the fourth consecutive quarter of constant delivery, which I guess is very critical for an enterprise which is in a recovery story.
First, revenues excluding Managed Services grew 5% in Q2 year-on-year. Second, profitability continued to improve meaningfully, notably gross margin which recorded a gain of 140 basis points to 32.6%, which allows us to post a 32.4% margin on H1 compared to 29.8% margin on H1 last year, and adjusted operating profit which totaled to EUR136 million as I have already mentioned, giving a margin of 4.1%. In total, over the first half, the operating profit increased by an amount exceeding EUR300 million compared to last year.