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Alcatel Losses Down

Light Reading
LR Mobile News Analysis
Light Reading
4/29/2003

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) reported a sequential drop in sales but showed progress in several key areas in its earnings report for its first fiscal quarter of 2003 (see Alcatel Halves Losses).

The company posted net sales of €2.96 billion (about US$3.27 billion), a sequential decline of 34.3 percent and a year-over-year decline of 31.1 percent. CEO Serge Tchuruk attributed much of the drop to a seasonal uplift last quarter and the impact of currency exchange issues (see Alcatel Darkens the Mood).

He also acknowledged the poor market picture. "The carrier markets continue to be soft and the economic and geopolitical environment may add a few points to the 15 percent degradation (in Euro) which we had forecast earlier for 2003," Tchuruk said in a prepared statement.

Despite these woes, Alcatel's gross margin for the quarter was 29.7 percent, up from 27.3 percent last quarter and 25.2 percent at this time last year.

Alcatel also posted a loss from operations of €161 million, representing a reduction of about 50 percent from the same time last year. Cash and cash equivalents this quarter were €6.206 billion ($6.85 billion), up from €6.109 billion ($6.743 billion) last quarter.

Still, the bad news is evident. Sales dropped across all Alcatel divisions since last quarter: Fixed communications, which includes carrier gear and optical networking, fell 35 percent to €1.317 billion ($1.45 billion); mobile communications dropped 38 percent to €798 million ($880 million); and private communications, which includes voice and data networking, enterprise gear, satellite equipment, and non-optical components (see Alcatel Redefines Itself), fell 28 percent to €952 million ($1 billion). A loss from miscellaneous other business sources of €106 million ($117 million) on top of these totals produced the net sales figure cited above.

Interestingly, Alcatel stands out in the wireless sector for having its networking division doing better than its mobile unit. Rival Nokia Corp.'s (NYSE: NOK) network division is doing poorly, while mobile is on an upswing (see Finns Flummoxed, Flopping and Network Warning From Nokia).

Despite these figures, Tchuruk maintains that Alcatel's performance is "good" in the access and mobile sectors. DSL access lines sold were up 40 percent, he says, and he predicts that a U.S. upswing in the access market could be on the horizon.

In mobile, sales were primarily hit by a temporary lack of color screens for mobile handsets, Tchuruk said. But he says sales continue to be "satisfactory." The company plans to reduce its emphasis on handsets anyway, execs said, and focus on handsets only as they fit into overall mobile solutions based on GSM (Global System for Mobile Communications) and GPRS (General Packet Radio Service) equipment, which represent today's most robust wireless markets.

So what's the big picture? At least one analyst says it's evident Alcatel's doing its cost-cutting homework. "Although Alcatel is faced with another unprofitable quarter, its gross margin results... show that at least the company has its costs... under control, meaning Alcatel is successfully transitioning fixed manufacturing costs into variable costs that can adapt to the sale fluctuations," writes Bill Lesieur, director at Technology Business Research Inc. (TBR) in an email note today.

If Alcatel can manage to keep its costs in line while improving market share, it should "emerge from the downturn as a top global player," Lesieur writes.

Alcatel seems to be working on that. The company continues to slash headcount: At the end of last quarter, it had a roster of 78,000, which it plans to chop 23 percent to 60,000 by the end of 2003.

Alcatel's also intent on disposing of assets that don't work. On today's call, Tchuruk acknowledged that Alcatel's again eyeing its Optronics division, though just how it would dispose of it, whether by sale or closure, remains a question. And reports in yesterday's European press said the French government is pressuring Alcatel to fuse its satellite division, which Alcatel has earmarked for major cuts this year, with the European Aeronautic Defence and Space Company. Alcatel sources in Paris could not be reached at press time to confirm that talks had begun, however.

— Mary Jander, Senior Editor, Light Reading

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