Alcatel Turns a Corner

Posts its first profitable quarter for three years and raises its forecast for 2004

April 30, 2004

5 Min Read
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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:

  • The 7750 IP service router (recently upgraded; see Alcatel Goes Mid-Range) is gaining serious traction with nine new carrier customers added in the first quarter, including TeliaSonera AB (Nasdaq: TLSN), described by Tchuruk as "a very demanding customer" (see TeliaSonera Picks Alcatel Service Routers). The 7750 is now being used by 20 operators, and is being tested by another 40, and "we're very optimistic about future" sales.

  • The optical equipment market is turning a corner, with year-on-year sales flat "for the first time in many years," says Tchuruk. He notes that Alcatel has been seeing strong demand for its next-generation optical products, such as the 1678 metro switch (see Alcatel Expands SDH MSPP Portfolio), and good demand for data products in general, wih 10 new customers for metro WDM equipment.

    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 market for VOIP-related gear is hotter than a plate of fresh frites. Alcatel now has 52 customers for its 5020 softswitch, recently announcing a sizeable deal in Eastern Europe (see Alcatel Wins Slovak Telecom VOIP Deal). This market is "becoming very significant," says Tchuruk.

    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.

  • DSL gear is flying out the door. Sales in the first quarter amounted to 5.5 million DSL lines, 100 percent up from the same period last year, when the company commanded just more than 40 percent of the global DSL market. Alcatel wouldn't say how much prices had gone down in the past 12 months, other than to say that price erosion isn't as strong now as it was a year ago.

  • Demand is growing for video over DSL products and services, which the company is pushing hard (see Alcatel, TDC Study Broadband Apps, Alcatel Denies iMagic Fadeout, and Alcatel Touts TV Over DSL). Tchuruk says a lot of the work here is in the form of systems integration, and that there has been demand from all over the world, including France (quelle surprise!), Italy, Russia, and France's quondam colony, Mexico.

  • The company's Chinese operation, Alcatel Shanghai Bell Co. Ltd., is now "fully operational," is becoming "more aggressive," is already profitable, and should experience about 30 percent growth in 2004.

    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

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