Signs of Stability at AlcaLu?

The net loss of €1.1 billion (US$1.73 billion) and the resignations of CEO Pat Russo and chairman Serge Tchuruk dominate today's coverage of Alcatel-Lucent (NYSE: ALU), but behind those headlines lurk some signs that Russo's successor might -- but only might -- come in as the giant vendor enters a period of greater stability and possibly even profitability. (See Russo, Tchuruk Out at Alcatel-Lucent and AlcaLu's Q2 Dragged Down by CDMA.)

The company delivered better than expected gross and operating margins, after the impact of the €810 million ($1.28 billion) impairment charge against the CDMA business, at 34.9 percent and 2.3 percent respectively. A year ago those margins stood at 33.4 percent and -0.4 percent.

In addition, operating expenses are 8.6 percent lower than a year ago, with Selling, General & Administrative (SG&A) expenses at 17.6 percent of revenues, compared with 18.2 percent in the second quarter of 2007, and research and development (R&D) costs running at 15 percent of revenues, down from 15.7 percent last year.

"I'm pleased with our progress in what is a very difficult market, given the complexity and challenges faced in bringing two companies together," stated Russo on today's earnings conference call.

So with the tide turning, in AlcaLu's view at least, "the time is right for changes. The merger phase is behind the company, and we're making good operational progress," stated Russo, who added that a new CEO and new chairman could bring a "fresh perspective to take the company to the next level" during the coming three to five years.

There were no hints during today's investor conference call as to whether Russo and Tchuruk would be replaced with external appointments.

Services soar
No one, it seems, predicted such a rapid rise in revenues from the Services division, which manages networks, provides integration services, and supplies OSS software to carriers and large enterprises around the world. Its revenues were up 9.1 percent year-on-year and up 20.4 percent sequentially at €818 million ($1.3 billion) in the second quarter.

Russo said the vendor's strategy of "pursuing opportunities that have a balance of top line growth and profitability" was paying off, and that there was a backlog of Services business on the books. The CEO said AlcaLu is now the No. 2 player globally in the carrier services market.

In the Carrier Group, where the CDMA decline has damaged the otherwise growing wireless business, AlcaLu pointed to significant progress with its IMS (IP Multimedia Subsystem) business, which it also refers to as NGN (next generation network).

That's been an area of high R&D but low revenues historically, but things are improving, according to the vendor: Without providing any numbers, Russo talked of "robust sales growth," a 50 percent reduction in losses, and a number of contract wins during the second quarter, including one at Belgacom SA (Euronext: BELG). (See Belgacom Selects AlcaLu.)

The CEO also pointed to the growth in GPON sales, but that has been tempered by the slowdown in DSL equipment: In the second quarter, AlcaLu shipped 7.7 million xDSL ports, down 20 percent from a year ago, but up 16 percent compared with the first quarter.

Regional outlook points to Asia
As North America's carriers hold back on capital spending and Europe shows signs of economic blight, AlcaLu, along with many other companies, is looking to Asia/Pacific, and other emerging regions, to fuel growth.

In the second quarter, Asia/Pacific accounted for 19 percent, €779 million ($1.2 billion) of the vendor's total revenues, but it sounds like the company is expecting greater things from the region, particularly India and, most of all, China, where the telecom market is undergoing a major revamp. (See China Begins $70B Carrier Revamp and table below.)

Table 1: Alcatel-Lucent regional breakdown for Q2 2008
Region Q2 2008 revenues % of Q2 revenues Change compared with Q2 2007 in local currency
Asia/Pacific �779 million 19% -4%
Europe �1,476 million 36% +7%
North America �1,189 million 29% -2%
Rest of World �656 million 16% +3%

CFO Hubert de Pesquidoux noted that Asia/Pacific is set to be "a big source of growth in the second half, especially in the fourth quarter," while Russo noted that wireless sales in China are expected to ramp later this year. That's because the current halt on spending during the current restructuring and in the lead up to the Beijing Olympic Games will be lifted, the carriers are already talking about their spending plans, and the Chinese government is on course to award 3G licenses. (See China to Get 3G – At Last! and China Telecom Unveils CDMA Plans.)

Russo noted that 3G-related spending, on CDMA, W-CDMA, and TD-SCDMA (China's own flavour of standards-based 3G technology), would likely "have a positive impact on 2009" sales.

But what's the deal with Europe? AlcaLu is warning that revenues from its biggest single region might suffer as macro economic conditions worsen, though Russo noted on the conference call that there are no concrete signs of this happening just yet. "We are anticipating possibilities -– there are some signs of growth slowing. We may see some weaknesses in spending and believe this would be most likely to affect fixed access, but we're not actually seeing any reduction" at the moment.

— Ray Le Maistre, International News Editor, Light Reading

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