1 Key Opportunity for Alcatel Lucent SA

Small cell adoption is on the rise as carriers seek cost-effective ways to boost cellular performance in specific areas. Can Alcatel Lucent continue to ride the rising tide?

Evan Niu
Evan Niu, CFA
Jun 10, 2014 at 11:31AM
Technology and Telecom

It may not be much now, but the market for LTE-based femtocells is taking off. Market researcher Infonetics estimates that the market will reach $2.3 billion by 2018, which is major growth opportunity compared to where the market currently stands. The market is still modest overall right now, bringing in just $144 million in the first quarter, representing 6% sequential growth.

Alcatel Lucent (UNKNOWN:ALU.DL) is already one of four market leaders by revenue, duking it out with the likes of Airvana, Cisco Systems, and ip.access.

Airvana Small Cell. Source: Airvana.

Residential deployments still comprise the majority of the small cell market right now, but enterprise adoption is starting to rise precipitously. The company estimates that 70% of enterprises experience poor mobile performance indoors.

Alcatel Lucent is keenly aware of the rising tide, as CEO Michel Combes detailed the company's efforts to refocus the wireless business on 4G LTE and small cells on the last conference call. In fact, this transition has helped the company dramatically improve the performance of its wireless access division.

Wireless access revenue was a third of consolidated revenue and is the biggest part of the access segment. Adjusted operating losses narrowed significantly in the first quarter to $50 million. That helped the segment's adjusted operating margin improve from negative 7.8% to negative 2.4%.

Within the femtocell market, LTE-based small cells bring in the most revenue per user and are helping drive growth. Older W-CDMA-based femtocells are still dominant in terms of units, but that technology is on the decline. Combes also mentioned on the call that Alcatel is working to reduce its exposure to legacy technologies.

Alcatel Lucent is enjoying traction in North America, which is a high-density market. Verizon Wireless deployed Alcatel Lucent small cells to improve LTE performance in several high-traffic environments in February. Small cells are the next evolution of cellular network infrastructure and will play an increasingly larger role in delivering mobile data.

Instead of spending billions of dollars on large macro site cell towers, carriers can use femtocells as cost-effective ways to increase performance in selective areas that are prone to poor performance. That includes high-traffic areas like shopping malls or entertainment venues.

This market won't go uncontested, though. Ericsson (NASDAQ:ERIC) is jumping in with both feet. Ericsson showed off its "Dot" at CES earlier this year, and shortly thereafter announced Vodafone as its first customer. Ericsson is larger and more profitable than Alcatel Lucent, so it may be able to chip away at its smaller small-cell rivals.