Alcatel Turns a Corner
Alcatel SA (NYSE: ALA; Paris: CGEP:PA) has put three years of quarterly losses behind it by recording a net profit in its first quarter of 2004. Not only that, the Gallic Gargantua today raised its financial forecasts for 2004, citing increased demand for IP gear and metro optical equipment as the key growth drivers (see Alcatel Reports Q1 Results).
The vendor announced net income of €134 million (US$160.5 million) from revenues of €2.74 billion ($3.29 billion), compared with a €461 million net loss from revenues of €2.96 billion a year earlier (see Alcatel Halves Losses). That's Alcatel's first quarterly profit since 2000.
Fixed costs have been dramatically coupé, and gross margins have risen to 36.6 percent, compared with 30.3 percent in the same period last year, and 25.7 percent in the first quarter of 2002. Such measures have led to an improved rating from Standard & Poor’s (see Q4 Earnings Push up Alcatel Rating).
As if that weren't bon enough, the company raised its outlook for the rest of 2004. CEO Serge Tchuruk says that Alcatel is expecting "high single-digit year-on-year sales growth," and that an analyst's estimate for second-quarter revenues of €3.2 billion is "in the right ballpark."
High single-digit growth for 2004 would put annual revenues at between €13.39 billion (a 7 percent increase) and €13.64 billion (a 9 percent increase), compared with 2003's €12.51 billion total. The CEO also notes that the earnings per share for the full year "are expected to be substantial."
And he's keen to point out that the raised forecast is based on terrain sûr. "We have good visibility on the second quarter, and good hints for the third quarter. We are seeing improvements in our order book. This is based on concrete things, not wishful thinking and dreams."
The profits and Tchuruk's optimism weren't matched by an uptick in the share price, however. The stock has followed the Nasdaq's downward trend, falling by 11 cents to stand at $14.74.
So what has led to Alcatel's rosé outlook?
Tchuruk says that, while there is ongoing contraction in the sales of legacy voice and optical equipment, increasing demand for IP equipment, and VOIP systems in particular, is driving growth. In addition, the French vendor is seeing renewed signs of life in the next-generation metro optical equipment market, spurred on by the ongoing uptake of broadband connections from homes and businesses.
Alcatel's key messages are:
Carriers need to upgrade their metro network capacity because of the surge in broadband use, said Le Chef. Broadband traffic has to go into the core network, and "carriers are running out of capacity in their metro networks." That situation, he added, will be made more acute by the growth of "bandwidth-hungry video traffic."
Alcatel will also see revenue this year and next for its subsea optical systems as a result of the recent, absurdly named Sea-Me-We 4 contract award (see Alcatel Wins Underwater).
The rise of VOIP has also had a positive impact on IP PBX sales, which accounted for about one third of the €865 million ($1.04 billion) in revenues from enterprise customers in the first quarter.
Tchuruk also notes that Alcatel's restructuring is still ongoing, and that the company still expected to décimer its workforce by about 6,000 during 2004, which would lead to restructuring costs of about €200 million each quarter.
— Ray Le Maistre, International Editor, Boardwatch