AlcaLu Looks to China
The shrinking CDMA business continues to be an albatross for Alcatel-Lucent (NYSE: ALU), but the vendor points to big opportunities for 3G sales in China later this year and more improvements in its WCDMA business. (See AlcaLu's Q2 Dragged Down by CDMA.)
According to outgoing CEO Pat Russo on a call with analysts today, double-digit revenue growth in WCDMA, GSM, and WiMax did not compensate for the bigger-than-expected decline in CDMA revenues in the second quarter. (See Russo, Tchuruk Out at Alcatel-Lucent, Signs of Stability at AlcaLu?, Euro Carrier Turfs Out Huawei, and WiMax: What's Working Now.)
AlcaLu reported a net loss of €1.1 billion ($1.73 billion) in the second quarter and revenues of €4.1 billion ($6.45 billion). In the wireless business, the vendor reported revenues of €977 million ($1.5 billion), which is down 17.5 percent compared with the same quarter last year and down 10 percent compared to the first quarter this year. (See AlcaLu Reports 2Q08.)
AlcaLu's CDMA business was hit extra hard this quarter by a "strong reduction in the capital expenditure of a key customer in North America," according to the vendor's press release. AlcaLu did not name that operator, but it is most likely to be Sprint Corp. (NYSE: S), or possibly Alltel Corp. (NYSE: AT), which is in the process of being acquired by Verizon Wireless . (See Vodafone Confirms $28.1B Alltel Takeover and Fixin' Alltel's 4G Hash.)
"We shouldn't kid ourselves that whenever two companies consolidate, there's some rationalization of capex," she said.
Last quarter, Russo refrained from pointing the finger at Sprint for its troubles in the declining CDMA business. But this quarter, it seems, the dramatic change in CDMA spending in North America -- and at one customer in particular -- was too great not to acknowledge it. (See It's All Sprint's Fault, It's Not Sprint's Fault, and CDMA Hits AlcaLu's Wireless Biz.)
"Customers are going through turnaround activities of their own, particularly in one case," she said.
The uncertainty around customer spending on CDMA in North America has led AlcaLu to alter its assumptions in this area for the rest of the year, which resulted in a non-cash impairment charge of €810 million (US$1.28 billion) against the CDMA business this quarter.
On the bright side
Last quarter, AlcaLu cut losses in the WCDMA business by half and that's exactly what it did again in the second quarter. Adjusted operating losses were halved in the WCDMA business this quarter. The work the vendor has undertaken to integrate three different WCDMA product portfolios from Alcatel, Lucent, and Nortel Networks Ltd. is paying off now. And this rate of improvement is expected to continue into next year, according to Russo. (See Alcatel Snags Nortel 3G Unit.)
"We'll continue to see the steady kind of progress we have seen... [that's due to] improvements in volumes and continued cost reductions," she said. "The momentum is building now that we've turned the [WCDMA] business around. We are absolutely participating in the growth of WCDMA in North America, given our position with AT&T Inc. (NYSE: T)" (See AlcaLu Expands 3G Biz With AT&T.)
Alcatel-Lucent said WCDMA revenue grew close to 60 percent this quarter compared with last year, and that was boosted by several customers including AT&T, Bouygues Telecom , and SFR .
Alcatel-Lucent is upbeat about its 3G prospects in China and India. (See India Plans 3G Auction, Top 10 Emerging Mobile Markets 2007, and A Guide to India's Telecom Operators.)
In China, AlcaLu anticipates a strong fourth quarter in terms of 3G sales, and that includes CDMA EV-DO, WCDMA, and TD-SCDMA. The country is already AlcaLu's second-largest market, and close to 90 percent of AlcaLu's business in China is done through its joint venture company, Alcatel Shanghai Bell Co. Ltd.
For CDMA, in particular, AlcaLu says it has good opportunities.
"We have teams of people actively responding to many bids around CDMA activities throughout China. While we fully expect this to be very competitive, we think we're in a good position given our position in the installed customer base," said Russo. "There is spending earmarked for the fourth quarter and going into 2009."
China Telecom Corp. Ltd. (NYSE: CHA) -- and its state-owned parent China Telecommunmications Group -- yesterday revealed plans to pour $11.7 billion over the next three years into upgrading its CDMA network that it is in the process of acquiring from China Unicom Ltd. (NYSE: CHU) (See China Telecom Unveils CDMA Plans, China Begins $70B Carrier Revamp, China Telecom's Big Numbers, China to Get 3G – At Last!, AlcaLu Lands Big $$ in Little China, AlcaLu Upgrades China Mobile, and China's Looming Infrastructure Bonanza.)
Several factors will come together in China in the fourth quarter that make AlcaLu optimistic about its opportunities there. For one, a temporary block on spending in the third quarter, which was imposed because of the massive market restructuring and the Beijing Olympics, will be removed. (See Signs of Stability at AlcaLu?)
"There will be a catch up from what didn't happen in the third quarter, the restructuring will have occurred, the Olympics will be over, and operators seem ready to move ahead with 3G deployments," said Russo.
But exactly how much revenue AlcaLu will generate in China and what margins any new contracts will have, of course, remain to be seen.
Russo believes, though, that 3G sales in China will have a "positive impact on revenue for 2009."
— Michelle Donegan, European Editor, Unstrung