Optical/IP Networks

Alcatel Serges on Triple Play

Alcatel (NYSE: ALA; Paris: CGEP:PA) delivered better than expected second-quarter numbers this morning, with CEO Serge Tchuruk saying that the second half of the year was shaping up to be even better as revenues from triple-play deployments help the vendor's wireline division reclaim some lost ground (see Alcatel Up in Q2).

Revenues of €3.15 billion (US$3.8 billion) were "way above forecast," said Tchuruk, and the earnings per share of $0.17 exceeded analyst expectations of $0.15. Those numbers, increased guidance for the year -- annual revenue growth of between 5 and 8 percent, instead of the low single digits -- and bullish talk about prospects for the second half, all helped to send the vendor's share price up by €0.48, 5 percent, to €10.15 ($12.31) on the Paris bourse.

And analysts are positive, too. Richard Windsor at Nomura Holdings Inc. says he has "little difficulty in keeping Alcatel as our favourite stock in the sector." In a research note issued today he stated this was "a solid set of results which, combined with the increase in guidance, should be well received by the market."

In amongst the welter of statistics and numbers were some interesting snippets about broadband spending trends, 's ongoing success in the mobile infrastructure market, and its growing presence in the IP routing market with its 7750 service router, courtesy of the Timetra acquisition (see Alcatel & TiMetra Seal the Deal).

And, of course, there was the usual tour de force from Tchuruk, who loves to comment on every question asked, whether it's asked of him or not. And he likes to tell it like it is. When asked about the potential for M&A among the sector's major equipment firms he stated, "Everyone wants to see consolidation, but everyone wants someone else to pay for cleaning up the industry and having the pain of a major acquisition. I'm not pursuing a massive consolidation for Alcatel as a way forward," he added, putting to rest any lingering questions about a merger with Lucent Technologies Inc. (NYSE: LU).

Fixed-line recovery in H2
While the CEO was the main speaker on today's call, Mike Quigley, the vendor's president and COO, and the perceived heir to Tchuruk's throne, was given far more airtime than usual, and he took on many of the questions related to the fixed-line equipment division, which saw its revenues fall to €1.22 billion ($1.5 billion) compared with €1.31 billion ($1.6 billion) a year earlier.

The dip had been expected, said Tchuruk, but a recovery is expected in the second half of the year as Alcatel "sees the benefits of the wireline upgrades" being undertaken by large carriers such as SBC Communications Inc. (NYSE: SBC), BellSouth Corp. (NYSE: BLS), and China Telecommunications Corp. (NYSE: CHA).

Quigley noted that deployments of next-generation access equipment based on triple-play service strategies had "accelerated in the first half of the year and will gather momentum in the second half of the year. We hardly have a wireline customer that isn't talking about triple play, and we see IMS architectures being built on top of network infrastructures built for video."

He added: "It's not just about access equipment. This is about optical equipment, too, and one reason we acquired Native Networks was because we wanted Ethernet capabilities in our OMSN [optical multiservice node] range." (See Alcatel to Buy Native for $55M.)

France Telecom, and BT's 21CN. The revenues from IP routing will be significant this year, about €200 million [$243 million)," said the CEO, noting that BT's 21CN project wasn't yet delivering any revenues.

Quigley added that Alcatel had "shipped 200 7750 routers to France Telecom in the first half of the year," which were being used as the IP edge routers for the carrier's IPTV service rollout.

Tchuruk said this deal was won late in 2004 but that FT, which one analyst on the call described as a "Cisco shop," hadn't wanted it publicized, and that Alcatel was the only IP edge router vendor involved in the rollout. "We are the only one -- there is no Cisco," the CEO intoned.

In the DSLAM market, Quigley said the latest quarter had been slow in North America, but, despite that, the company had shipped a record 5.9 million lines worldwide in the second quarter. "We expect to see a pickup in DSL sales in North America in the second half of the year, and the third quarter will be much stronger there in terms of net line additions."

He said Alcatel was set to ship a total 22.5 million DSL lines in 2005, of which 3 million would be IP DSLAM lines. That would increase to an estimated 6 million IP DSLAM lines in 2006, about 20 percent of the total.

And Quigley shot down the misconception that IP DSLAMS were cheaper than traditional ATM-based units. "There are continual price and cost reductions in the DSL market -- it's a very tough market and we're battling order by order. But while Ethernet-based DSLAMs provide a lot of benefits to carriers, they're not cheaper."

Mobile: growth and NGN hopes
While Alcatel's wireline business wilted in the second quarter, its mobile infrastructure division increased its revenues nearly 35 percent year-on-year to €958 million ($1.16 billion). Tchuruk said the sales showed ongoing demand for the company's hybrid 2G/3G infrastructure, with new contracts in Brazil, Nigeria, Russia, France, and China.

The CEO was more excited about the future prospects for the technology gained from the Spatial Wireless acquisition (see Alcatel in M&A Frenzy). "The mobile NGN core has possibly even greater potential than wireline NGN. We have 20 trials, and two deals, of our IMS-based mobile NGN, and great expectations for this technology. The bottom line may be negative from this business at the moment because of the costs involved in working with customers, but we expect this will change by the end of this year and into 2006."

— Ray Le Maistre, International News Editor, Light Reading

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