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Optical/IP

Alcatel Reports Q3 Results

PARIS -- Alcatel's (Paris: CGEP.PA and NYSE: ALA) Board of Directors reviewed and approved third quarter 2006 results. Revenues were up by 1.4% at Euro 3,335 million compared with Euro 3,289 million (up 2.7% at constant Euro/USD exchange rate) in the same period last year. The gross margin was 33.6%. Operating profit* amounted to Euro 258 million, a 7.7% operating margin. Net income (group share) for the quarter was registered at Euro 155 million or a diluted EPS of Euro 0.11 per share (USD 0.14 per ADS), (Euro 0.10 per share, excluding capital gains) which compared with a diluted EPS in third quarter 2005 of Euro 0.19 (Euro 0.12 per share, excluding capital gains).

Serge Tchuruk, Chairman and CEO, summarized the Board's observations:

"The third quarter once again confirmed Alcatel's leading position in the transformation of networks toward a high bandwidth, full IP architecture providing enhanced triple play services to end users and reducing operating costs for the carriers.

In the wireline sector, this translated into increasing traction for our IP, access, optical and applications solutions in the carrier and enterprise markets where Alcatel's revenues (excluding the seasonal submarine activity) grew by over 10%. The strong inroads of Alcatel in the IP routing market were again highlighted by a near doubling of revenues over the same period last year. Likewise, terrestrial optics as well as enterprise applications revenues grew by over 20% and 30% respectively, with Alcatel's product portfolio clearly outpacing competition.

This strong performance was partially offset by a decline in our wireless revenues, whose annualized growth had averaged 25% in eight successive quarters, and where the evolution toward IP technologies and new video services is still at an early stage. In the emerging countries where the number of 2G greenfield deployment projects is diminishing, we maintained our selective commercial policy, deliberately abstaining from large contracts where risks are high in the medium term. Furthermore, while most customers have indicated their strong support for our strategic moves with Lucent and Nortel, the materialization of our currently active 3G projects will only occur once these transactions are closed. We are continuing our strong focus on investment in next generation technologies such as NGN, IMS, and WiMAX to secure a leading position in future network builds.

We continue to make good progress toward our pending merger with Lucent Technologies and believe we will complete a successful closing before the end of the year. Both the Thales transaction and our acquisition of Nortel's UMTS radio access business are also on track and we maintain our objective of nearly simultaneous closings before year end. While these strategic moves are currently putting pressure on Alcatel's organization as well as additional costs in our P&L, we are today more than ever convinced that they will generate value for the company. Our objective will not only be to hold the number one position in wireline, but also to be one of the very few strategic suppliers to Tier 1 wireless players, making us the key player for the fixed, mobile, and enterprise convergence.

As stated last quarter, the structure of the company will significantly change in the coming quarter, therefore we will not be providing company specific guidance at this time."

Alcatel (NYSE: ALA; Paris: CGEP:PA)

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