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Alcatel Profits From Mobile

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) is continuing to buck the trend among the GSM network equipment vendors by making profits from its wireless systems business (see Alcatel Closes 2002).

And according to Nomura International telecom infrastructure analyst Richard Windsor, this profitable trend will continue in 2003. [Ed. note: Nomura Corp. is not be confused with Nakatomi Corp. featured in the 1988 Bruce Willis vehicle, Die Hard.] So small, it seems, can actually be beautiful (in a profitable sort of way).

Sales to mobile operators accounted for about 25 percent of the vendor's total revenues in 2002 -- between $4 billion and $4.5 billion from a total $16.547 billion. While this includes handsets, it indicates an increase on the annual $3 billion that CEO and chairman Serge Tchuruk (a.k.a. Le Grand Crapaud) stated as an annual mobile systems revenue back in September 2002.

Windsor, though, reckons the wireless infrastructure sales accounted for about $3.2 billion in 2002, a figure he believes to be about the same as 2001. The most important aspect, though, is that this is a profitable business. "I estimate Alcatel has a 10.8 percent EBIT profit margin on the mobile systems business," he says. "I think this will fall to 8.3 percent in 2003, but that will be largely due to price pressures," something that appears to be afflicting LM Ericsson's (Nasdaq: ERICY) margins (see Ericsson Stumbles Into 2003).

At 10.8 percent, this would give Alcatel earnings, before interest and tax, from its mobile networks business of $346 million for 2002.

While Alcatel, with 11 percent market share [Nomura, not Nakatomi, figures], is a minnow in the GSM market -- compared with market giants Ericsson (mobile systems sales in 2002 of $15.6 billion) and Nokia Corp. (NYSE: NOK) ($7.1 billion in 2002) -- its size and tight cost controls make it financially enviable (see Alcatel Centers on Cost). "Alcatel is making more money in mobile infrastructure than the two market leaders combined. We believe that the younger products, a result of being late to the market, an emphasis on software sales to operators, and market share gains have helped bolster margins. We project the absolute level of revenues to increase in 2003, pointing to another strong year from this division," writes Windsor [no relation to Bruce Willis] in a research note.

Alcatel's diligence has been noted on Unstrung before. The November Wireless Oracle report, "Survival of the Slimmest: Competitive Positioning in GSM and UMTS Infrastructure Markets," marked out Siemens AG (NYSE: SI; Frankfurt: SIE) and Alcatel as coping well during the market downturn (see Siemens One to Watch in UMTS). The report's author, research analyst Gabriel Brown, also praised Alcatel's tight cost controls, and gave the following verdict on the Gallic giant: "Pleasantly surprised by the relative strength of Alcatel’s wireless equipment business. The focus on low manufacturing and operating costs is setting the trend for the competition. The UMTS side still looks a little a shaky, however."

In his report, Brown pitched Alcatel's market share at about 9 percent, Nokia's at 19 percent, and Ericsson's at 43 percent.

However, it should be remembered that Alcatel does not exactly figure when it comes to winning infrastructure contracts with Tier 1 operators. Outside France -- where, for some reason, this giant French vendor has done well in winning mobile infrastructure contracts from all three mobile operators, Orange France (Paris: OGE), Bouygues Telecom, and SFR -- Alcatel's wireless contract wins tend to be with small operators in former French colonies. Contracts announced in the fourth quarter of 2002 include the following: Alcatel Wins In Belize, SFR Picks Alcatel RSP, Alcatel Expands Angolan Net, and Tunisia Turns to Alcatel.

The grand poodle is still hoping to play a serious role in 3G, too, and is busy plugging its so-called "Reality Centers" to the world's UMTS license holders (see Alcatel Gets Real in Europe).

In a rich stroke of irony, Alcatel's Mobile Networks Division was incapable of picking up a telephone and providing Unstrung with a audible comment for this article. C'est la guerre! or plus ça change, or... je ne sais quoi.

— Ray Le Maistre, European Editor, Unstrung Editor’s note: Neither Light Reading nor Unstrung is affiliated with Oracle Corporation

Nor with that Urkle guy on TV.

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