AlcaLu's Russo: We're Under Attack!
Alcatel-Lucent (NYSE: ALU) CEO Pat Russo lashed out at her company's main rivals today, saying that their undermining tactics have resulted in greater costs and an even harsher price environment in the first half year of AlcaLu's operations.
Her comments came during today's earnings conference call as AlcaLu reported a second-quarter net loss of €586 million (US$803 million) and management provided little insight on when the company might return to profitability. (See Alcatel-Lucent Slumps on Q2 Loss .)
That combination sent AlcaLu's share price dipping by nearly 10 percent on the New York Stock Exchange (NYSE) , where it fell by $1.29 to $11.97 by mid-morning. In Paris, the stock finished the day down 9.9 percent at €8.64.
Russo, responding to a stream of analyst questions about her company's depressed gross margins (33.4 percent in the second quarter, compared with 38.1 percent a year earlier), stated that the vendor is experiencing a "difficult pricing environment. Competitors have been trying to unseat us during our integration period."
Russo and CFO Jean-Pascal Beaufret both stated repeatedly that the quarter's gross margin number is "lower than we would like and not indicative of the business going forward," but that it isn't possible to provide any guidance yet.
Russo added that the company, which began operations on December 1 last year, has been forced to invest in research and development to prepare for the future, and to help carriers during their transition phases as they migrate to new, IP-based networks. It has also been forced into some "product transition costs" and "strategic investments."
These "strategic investments" appear to include the costs of hanging on to existing business. "In our early days we have had some attacks on our customer base with offers [to our customers] of swap-outs, and we decided to take action to retain our customers," and those actions have added to the vendor's short-term costs, she noted.
Still, both the CEO and CFO were adamant that no margin guidance could be given until early 2008, though Russo stressed that the company is working hard on cutting costs by rationalizing its product portfolio and manufacturing capacity and finding procurement savings.
However, "the unknown factor [that affects] gross margins is industry prices," stated Russo, though in direct response to an analyst question about whether the merger will be worthwhile, she added, "We will be able to produce better margins than we would have been able to produce separately..."
"We believe in the long-term benefits of the merger, [though] some near-term issues have hit gross margins in this quarter. We are managing a large, complex integration in an industry that's not waiting for us to complete the process. We expect a strong ramp in revenues [during the second half of the year] based on the strong order flow, though obviously we need to execute against those customer orders."
The company's cost base will also be lower by the end of this year, stated the CFO. Second-quarter operating costs, at €1.5 billion ($2 billion), were down 3 percent compared with a year earlier and down 3.4 percent compared with the previous quarter.
Some of those savings come from headcount reductions. During the second quarter 1,900 staff left the company, taking this year's total to 3,800, about 30 percent of the three-year jobs cull target of 12,500. AlcaLu says it's on course to achieve its annual cost savings target of €600 million ($822 million) this year. (See Alcatel-Lucent Job Cull Hits 12,500.)
"The reduction in our operating costs is accelerating," said Beaufret, "and savings will be more visible in the second half of the year."
Russo is even bullish about AlcaLu's performance in the ultra-competitive wireless infrastructure market, where the company has performed poorly in the first half of the year. The CEO said the vendor will start to see the impact of its new GSM platform, with its "better functionality and cost profile," in the second half of the year, and that the comp any has "good growth prospects in GSM and WCDMA," especially in "emerging, high-growth markets."
AlcaLu has already announced a customer for the new GSM platform, which comprises its Twin TRX radio transceiver that doubles base station capacity and its ATCA-based BSC (base station controller). (See Kenya's Celtel Picks AlcaLu.)
Despite the positive noises about better revenues and lower costs in the coming quarters, some analysts believe the company has a long way to go before it returns to consistent profitability.
Dresdner Kleinwort analyst Per Lindberg has a price target of €8.00 on the stock, describing today's financials as "lackluster." The bank estimates that AlcaLu will deliver full-year 2007 revenues of nearly €18.4 billion ($25.2 billion) and a net loss of €818 million ($1.1 billion).
Lindberg believes it will be 2009 before the company posts a net profit for a full year's trading.
Alcatel-Lucent isn't the only recently merged vendor giant that's struggling to find its feet. Nokia Corp. (NYSE: NOK) is set to report a net loss for its Nokia Networks infrastructure joint venture when it reveals its second-quarter earnings this Thursday, August 2. (See Bad Start for Nokia Siemens.)
— Ray Le Maistre, International News Editor, Light Reading
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