Optical/IP Networks

AlcaLu Cuts 2007 Outlook by $1.25B

Alcatel-Lucent (NYSE: ALU) saw its share price fall by more than 11 percent on the Paris stock exchange Thursday morning after it lowered its revenue outlook by up to $1.25 billion for the full year. (See AlcaLu Provides Update.)

Despite reporting disappointing results for its first and second quarters this year, and citing unrelenting pressure from major competitors, AlcaLu's management had, until now, maintained that full-year revenues were set to grow "in the mid single digits," at a constant Euro/US$ exchange rate. (See Alcatel-Lucent Slumps on Q2 Loss , AlcaLu's Russo: We're Under Attack!, and Merger Tears Into AlcaLu's Sales.)

Now, though, the company -- which was formed on December 1 last year following the merger of Alcatel and Lucent -- "expects its full year 2007 revenue growth to be flat to slightly up at a constant Euro/USD exchange rate." (See Alcatel-Lucent Stays Tight-Lipped, Alcatel, Lucent Merge, and Farewell, Lucent.)

What does that mean? Well, the vendor's pro forma 2006 revenues -– the revenues Alcatel-Lucent would have generated if it had been a merged company for the whole of 2006 -– were €18.3 billion ($25.45 billion). So revenues for 2007 are now expected to be €18.3 billion, or slightly better, compared with the previous guidance of around €19.2 billion ($26.7 billion). That means AlcaLu now expects its 2007 revenues to be up to €900 million ($1.25 billion) lower than previously estimated.

The company says the revised forecast follows recent discussions with wireless customers in North America. AlcaLu "is now seeing a change in capital spending with those customers in 2007, compared to what it had anticipated. As a result, the company is not seeing the projected volume changes that would have mitigated the ongoing pricing pressures it is experiencing."

A spokesman for the company says that it can't provide "any details on specific customers accounts," or even say whether the impact comes from a small number of large customers.

The vendor's main wireless customers in North America are Verizon Wireless and Sprint Corp. (NYSE: S), both of which are large and long-time Lucent CDMA infrastructure customers. (See AlcaLu Wins $6B Verizon Deal, Sprint Speeds Rev A Rollout, Duo Rev Up CDMA, and Lucent Supplies Sprint.)

Even before the companies merged, analysts were concerned about the potential of the vendor's CDMA business. (See Could CDMA Hurt Alcatel Lucent?)

The company adds, though, that in "other regions and businesses, in particular wireline, enterprise and Asia-Pacific, revenue performance continues to be strong."

The news sent AlcaLu's share price down by €0.81, more than 11 percent, to €6.44 on the Paris exchange.

That means the company has lost more than 36 percent of its value during its nine-and-a-half months of operations. When Alcatel-Lucent began its life on December 1, 2006, its share price opened at €10.12.

That slump is bound to put pressure on CEO Pat Russo, who was recently named at the 10th most powerful woman in the world. (See The Power of Russo.)

She is retaining a positive stance, though. In the company's prepared statement, Russo says: "While the company acknowledges that it is competing in a challenging market environment and executing a complex merger, it remains confident that it has the right combination of people and assets to position the company as a leading player in the industry.”

Better H2 needed
Even at the lower revenue target, AlcaLu will need to up its game during the second half of this year.

Its total revenues for the first half of 2007 were €8.2 billion ($11.4 billion), which means the company needs to generate at least €10.1 billion ($14 billion) in revenues in the second half of the year to match 2006's sales.

AlcaLu says revenues in the third quarter, which closes at the end of this month, are estimated to "grow slightly" compared with the second quarter's €4.3 billion, and that fourth-quarter revenues are "expected to ramp-up strongly over the third quarter," driven by "IP transformation, broadband deployment and associated services."

The analyst team at Dresdner Kleinwort expects the vendor to report third-quarter revenues of €4.47 billion ($6.2 billion) and fourth-quarter revenues of €5.38 billion ($7.48 billion).

The outlook isn't good for profitability either, as the North American CDMA business delivers healthy operating margins of around 20 percent, according to estimates from the Dresdner analysts.

The company says "the change in revenue mix is expected to negatively impact the profitability of the company, especially in the current [third] quarter," and that operating income for the current three-month period is "expected to be around breakeven."

Consequently, the vendor is looking to cut costs above and beyond its restructuring program. It says it's on course to achieve the planned €600 million ($833 million) in savings related to merger synergies, and will now "accelerate the execution of its current restructuring program and... implement additional focused cost reduction plans in markets which require further actions to be taken."

AlcaLu says it will update investors and analysts on its plans when it reports its third-quarter results on October 31.

— Ray Le Maistre, International News Editor, Light Reading

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