Is This Contract a Game-Changer for Alcatel-Lucent?

Over the past couple of years, Paris-based Alcatel-Lucent (NYSE: ALU  ) has been going down a rocky road, struggling to put its finances in the black while reeling under the burden of cutthroat competition.

The telecommunications-gear maker just won a contract to help build Telefonica's (NYSE: TEF  ) next-generation wireless network in Spain. Will Alcatel give its peers a run for their money, after all?

Why this deal is so important
Alcatel will deploy 8,000 4G LTE, stand-alone base stations overlaying Telefonica's existing 3G network. That's a drop in the bucket compared to T-Mobile's LTE rollout in the U.S., which involves 37,000 next-generation base stations. In addition, Alcatel is not the only one having a hand in Telefonica's LTE buildout. Market leader Ericsson will provide the Spanish provider with 1,000 nodes in 2013 alone, including the ones in Barcelona and Madrid.

Even so, that's the biggest 4G LTE contract Alcatel has ever landed in Western Europe. Amid macroeconomic headwinds and plummeting service revenues, European telecom operators have been dragging their feet on deploying 4G networks. On top of that, Alcatel's decision to focus on the "overlay" technology solution, which is more popular in the U.S. market and not so much in Europe, weighed on its European wireless business. That's all about to change. This contract could be a shot in the arm for Alcatel, enabling it to get a firm grip on the European LTE market.

As far as Telefonica is concerned, it's about time it got the ball rolling on its own nationwide network. Vodafone, Orange and TeliaSonera-owned Yoigo have already launched their 4G services in Spain.

In order to keep up with its peers, Telefonica signed a network-sharing agreement with Yoigo last month. Under the terms of the agreement, which will run until 2016, Yoigo gave Telefonica access to its LTE network. In return, Yoigo will use Telefonica's fiber network, meaning that it will be able to offer fixed broadband services along with mobile services.

Competition is obviously heating up in a market that's crucial for Telefonica, since the company's Spanish division manages the access of around 37% of its total clients in Europe. The sooner Telefonica wraps up its 4G build-out, the better.

Wait a minute...
This contract is a feather in Alcatel's cap, but it doesn't necessarily mean that the company's wireless problems in Europe are a thing of the past. EU regulators' plans to ban roaming charges for incoming calls and to put a lid on other tariffs next year raise a red flag.

As soon as regulators go through with their plans, Telefonica will be faced with skimpy profit margins, leaving Alcatel, as well as other equipment makers, sort of up the creek.

However, over the medium term, a possible consolidation of the telecom services industry in Europe could benefit Alcatel. It's highly likely that big telecom operators will jump at the chance to take over smaller, less profitable rivals in hopes of achieving economies of scale. Eventually, they will have to ramp up spending on network infrastructure.

Moreover, Nokia's (NYSE: NOK  ) latest business moves have created quite a stir.

Nokia sold its handset-manufacturing unit to Microsoft for $7.2 billion and bought Siemens' stake in Nokia Solutions and Networks, or NSN, a specialist in mobile broadband formerly called Nokia Siemens Networks. This unit will account for almost 90% of Nokia's revenues.

Following the Microsoft deal, analysts have been buzzing with speculation that the Finnish telecom will bid for Alcatel's wireless unit -- a move that would make NSN a much stronger player. Nokia is clearly chasing networking-equipment profits, making waves in the entire network infrastructure industry.

Will Alcatel make it?
In response to years of poor performance, Alcatel introduced a three-year turnaround plan, which includes cutting costs and focusing mainly on its core networking business, among other initiatives. This strategy makes sense, since Alcatel already has a strong foothold in the edge router market.

On the LTE front, besides the contract with Telefonica, the equipment vendor recently grabbed a 13% share of China Mobile's $3.26 billion of base-station supply contracts. That's higher than what Ericsson and NSN got.

Also, it's teaming up with chipmaker Qualcomm to develop mobile, "small-cell" technology, aiming at cashing in on operators' growing appetite for mobile data capacity.

These deals help paint a brighter picture for its future.

The takeaway
A turnaround doesn't happen overnight. Alcatel still has a long way before it can exit its doldrums.

Investors should stand pat on the stock and wait until Alcatel shows signs of margin gains and positive free cash flow. 

Want More Hard-Hitting Tech Analysis From Motley Fool?
The tech world has been thrown into chaos as the biggest titans invade one another's turf. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2013, at 3:56 PM, DZPM wrote:

    Nothing new! Barak Obama, Federal Reserve comity and Ben Bernanke “Giant Ponzi Scheme” .When we have bad economic data market is going up on speculation Fed Chairman Ben S. Bernanke will kip printing money. When we have god economic data market is going up speculation Bernanke is steel printing? This entire look like exuberance sign of market is in the crash mod and will burst 1000 down ward point any second. There is no exist without big consequences Bernanke know that and kip printing money we all American will go down to drain. Either way he will finish as slowly anyway. Bernanke ruin billions and billions of ordinary people’s lives with kipping interest zero in favor of Banks and Speculators Bernanke committed the biggest crime to humanity The Biggest Ponzi Scheme Ever. Bernanke is a Scam bag! Communist was using seam principals like Fed > Bernanke (printing money for ever), and day collapsed next is USA to Collapse, because off sociopath Bernanke. Printing money is poor pyramid scams, artificial unreal! Stock and everything is doom for crash. Every pyramid scam crash everybody loses regular investor watch out doesn’t fall in to the trap.

    A record breaking stock market is distorting a frightening reality: The U.S. is being eaten alive by a horrific cancer that will ultimately destroy the economy and impoverish the vast majority of its citizens.

    That's according to Peter Schiff, the best-selling author and CEO of Euro Pacific Capital, who delivered his harsh warning to investors in a recent interview on Fox Business.

    "I think we are heading for a worse economic crisis than we had in 2007," Schiff said. "You're going to have a collapse in the dollar...a huge spike in interest rates... and our whole economy, which is built on the foundation of cheap money, is going to topple when you pull the rug out from under it."

    Schiff says that, despite "phony" signs of an economic recovery, the cancer destroying America stems from a lethal concoction of our $16 trillion federal debt and the Fed's never ending money printing.

    Currently, Bernanke and company is buying $1 trillion of Treasury and mortgage bonds a year. That's about $85 billion per month against a budget deficit that is about the same level.

    According to Schiff, these numbers are unsustainable. And the Fed has no credible "exit strategy."

    Eventually interest rates will rise... and when they do, Schiff says, stocks will tank and bonds dip to nothing. Massive new tax hikes will be imposed and programs and entitlements will be cut to the bone.

    ALU is one of the most highly leveraged companies in the Communications Equipment industry and has a Debt to Total Capital ratio of 72.24%. Additionally, the percentage of debt used in its capital structure grew this year. Its Interest Coverage ratio is only 0.36, which means that it does not earn enough from day-to-day operations to service its debt. And when interest rate go up watch is eminent ALU is Dum for crash.

    Long-Term Earnings Growth is Very Negative Cash Flow is Very Unattractive Recent Earnings were Very Disappointing Recent EPS Change is Very Unattractive

    ALU will greatly underperform market Strong Sell.

  • Report this Comment On September 18, 2013, at 9:37 AM, goldman2too wrote:

    is the writer dzpm taking his medication? someone should delete the crazy peoples posts as its taking up valuable space. did they mention the government also inserted a chip in them while sleeping?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2640445, ~/Articles/ArticleHandler.aspx, 9/30/2014 12:14:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement