Alcatel Lucent SA (ALU): This Telecom Giant Faces Tough Challenges Ahead

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Alcatel Lucent SA (ADR)Alcatel Lucent SA (NYSE:ALU) is going through a rough period. The company faces tough challenges ahead. Its cash flows and income are declining. The last fiscal year was a very bad one for the company. Its net income tremendously dropped from net positive earnings to net losses. Its debt is rising whereas cash flow from operations turned negative.

On top of that, it is also facing tough challenges in the market due to stiff competition. Alcatel Lucent SA (NYSE:ALU) is facing a tough time competing with Ericsson (NASDAQ:ERIC) and Cisco Systems, Inc. (NASDAQ:CSCO) . The telecommunication equipment war is focused on quality and price. To stay competitive in the price war, companies must have a low-cost structure. Alcatel already has a major issue on this aspect, particularly compared to low-cost Chinese competitors.

While Alcatel Lucent SA (NYSE:ALU) has a global footprint, majority of its revenue, about 72%, comes from the European and the U.S. markets. Unfortunately, it is facing tough times in Europe, significantly affecting its overall revenue growth.

Its best bet now lies in the U.S. market. The company has to strengthen its stronghold in the U.S. At the same time, it needs to improve its market share in Europe and South America.

A major highlight of Alcatel’s financials is the sharp decline in net income. It posted a staggering drop, from $1.49 billion in net income in 2011 to a net loss of $1.91 billion. That’s more than a $3 billion decline in earnings within a year.

For the first quarter, Alcatel Lucent SA (NYSE:ALU) beat estimates. But the cash flow remains weak. In fact, the company has never posted positive free cash flow since the merger of Alcatel and Lucent in 2006. At present, the cash cycle of Alcatel Lucent SA (NYSE:ALU) is 59 days. This is quite high, leading to growing concerns on the relatively poor liquidity ratios of the company.

Alcatel Lucent SA (NYSE:ALU) also faces a near-term debt concern of close to $3 billion, which is due within three years. Total liabilities amount to $24.62 billion. Therefore, the company needs to trim down its expenses in order to shore up enough cash flow. This is crucial for the refinancing and roll-over of its debts.

The huge debt exposure forced the company to contemplate on laying down its last cards. Alcatel Lucent SA (NYSE:ALU) is now eyeing on using its patents as collateral to raise a billion dollars at least. The value of its patent portfolio could be as high as $9 billion. Alternately, Alcatel-Lucent plans to use its routing business as collateral, in lieu of the patents.

Putting all these valuable assets on the table as collateral is a relatively risky bet. But, it seems this is the last resort to fuel a major breakthrough. However, it may also be a good strategy for a complete turnaround. But, the success heavily relies on the company’s cash management. With a new CEO in place, there are high hopes for Alcatel Lucent SA (NYSE:ALU) to survive the financial turbulence.

Alcatel is not the only company that is suffering from intense competition in the industry. Both Ericsson (NASDAQ:ERIC) and Cisco Systems, Inc. (NASDAQ:CSCO) also experienced low prices. Due to the financial crisis, most companies opted for low-cost manufacturers, which slashed the market shares of brand names such as Alcatel Lucent SA (NYSE:ALU), Ericsson and Cisco. As a result, the investors in these companies have faced substantial capital losses in the last five years.

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