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Alcatel Slumps on Earnings News

Light Reading
LR Mobile News Analysis
Light Reading
4/28/2005

Alcatel (NYSE: ALA; Paris: CGEP:PA) stock hit 52-week lows in Paris and New York today after the French network equipment maker announced a 55 percent drop in first-quarter earnings.

Alcatel stock price fell 11 percent to $10.46 in midday trading at the NYSE in response to a drop in earnings from €278 million ($359 million) in the year-ago quarter to €124 million ($160 million) in the March quarter (see Alcatel Profits Disappoint and Alcatel Reports 'Solid' Q3 Results). The stock also saw 52-week lows in Paris where it closed down 8 percent at 8.25 euros.

Alcatel’s revenues improved 3.7 percent to €2.61 billion ($3.37 billion) but still disappointed analysts, who had expected between €2.63 billion ($3.39 billion) and €2.64 billion ($3.40 billion).

Alcatel CEO Serge Tchuruk blamed the poor results on a “very competitive market environment” and “a traditional seasonally low first quarter.” But the real culprits were low margins in the company’s fixed and private (enterprise) communications businesses, which showed weak earnings.

“Faster than expected declines of legacy businesses and a slight loss of market share in access were to blame for the very low profitability at fixed communications,” explains analyst Richard Windsor of Nomura Holdings Inc. in a research note today. Windsor says Alcatel's xDSL business is undergoing a transition from ADSL to ADSL2+. “This is worrying as price competition in this space is brutal and volume is critical to maintaining margins.”

Alcatel's private communications also came in below expectations due to slow sales of IP voice to enterprises, Windsor says.

Of primary concern to analysts, however, is Alcatel's €107 million ($138 million) in operating profit in the first quarter -- they had expected €158 million ($204 million). Operating margins for the quarter came in at 4.1 percent.

But Alcatel’s Tchuruk remains optimistic, even bullish on his company’s near-term prospects. “We anticipate a low to mid single-digit growth rate in revenues year-over-year for the second quarter as well as for full year 2005 at a constant Euro/USD exchange rate,” Tchuruk says in an Alcatel release. “Earnings per share should grow at a double-digit rate for the full year."

Overshadowed by the poor net results was Alcatel’s mobile business, which performed well in the first quarter. The business unit’s revenue increased 27.9 percent to €789 million ($1.01 billion) from €617 million ($796 million) in the same period last year.

— Mark Sullivan, Reporter, Light Reading

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