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  • Alcatel-Lucent reported Q2 Earnings last week.
  • Quarter confirms view that recovery is on track, but IP routing faces near-term challenges.
  • Weak IP router business in China not anticipated.

Alcatel-Lucent (NYSE:ALU) reported second quarter results that were weak on the surface. Bullish speculators who push shares higher ahead of the event lost all their gains. The stock gave back all of its gains, as it rallied from around $3.40 to over $3.80 in July. The stock is now trading lower than where it was when the company was last reviewed in May. Though the quarter was disappointing, Alcatel-Lucent's progress in its transition is still on track. Alcatel-Lucent added several LTE wins during the quarter. It was also selected by Vodaphone (NASDAQ:VOD). Overall, growth in wireless improved 28 percent over last year. Ultimately, sustained growth will depend on the progress of the firm's rollout in China. Alcatel-Lucent continued to boost its LTE investments in the region in anticipation for stronger demand.

Contrary to the original bullish investment thesis, IP routing fell 7 percent. The company said during its conference call that investors should expect short-term results will be lumpy. Longer term, Alcatel-Lucent's transition from legacy products to new generation ones continues. As of June 30, 2014, Alcatel-Lucent now has 28 IP core router contracts and over 480 customers for its 1830 PSS (Photonic Service Switch).

Restructuring efforts are on track. By 2015, the firm will cut EUR 1 billion in costs. The firm will also explore spinning off its Alcatel-Lucent Submarine Networks ("ASN") through an IPO. The proceeds should ease near-term pressures from lower revenue in Europe and in North America and negative cash flow. The firm ended the quarter with EUR 4.7 billion in long term debt. Short-term debt rose from EUR 556 million in the first quarter to EUR 1.65 billion.

Disclosure: The author is long ALU. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Update: Alcatel-Lucent Earnings

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