Alcatel Upbeat on Q3
Alcatel SA (NYSE: ALA; Paris: CGEP:PA) reported a two-and-a-half-year high in operating income today, and execs said the worst of the telecom downturn is over (see Alcatel Q3 Sales Slip).
Alcatel showed €160 million (about US$186 million) in income from operations, more than a six-fold increase from last quarter (see Alcatel Narrows Q2 Loss as Sales Slip). Net losses were reduced by 58 percent, to €284 million, about ($331 million).
Alcatel's starting to see its cost-cutting efforts pay off in healthier ratios of profit and operating income to sales. The gross margin was 35.6 percent, compared to last quarter's 31.4 percent. The operating return on sales ratio was 5.3 percent, up from 0.7 percent last quarter and -4.6 percent for the first quarter 2003. Net cash on the books is €541 million (about $629 million).
While quarterly net sales fell 3 percent sequentially to €3.04 billion (about $3.53 billion), execs said reaching breakeven at that level was better than expected, and the near-term outlook is good. "Fourth quarter sales should grow sequentially in the twenties, with our operating return on sales up by a few points," stated CEO Serge Tchuruk, in a prepared statement. Operating income for the year will be positive, he said.
Tchuruk characterized the telecom market, which accounted for about 44 percent of this quarter's sales, as "still soft but stabilizing," on a conference call with financial analysts today. Broadband access and DSL are strong, and Alcatel sees "traction" in IP telephony and IP routing. Applications software, such as programs provided to carriers for messaging and other telecom services, is another bright spot.
The worst of the telecom downturn is over, Tchuruk said, particularly in Europe. While it's not clear whether market movement will be "flat, flattish, up, or down a bit" in the future, carriers are out of their cash crunch and talking to Alcatel about ways to improve their networks. Still, Tchuruk said, these talks haven't materialized into actual orders.
Tchuruk said the enterprise equipment market, which accounted for about 32 percent of sales, is also out of the doldrums. But he refused to elaborate, saying only that he saw "colorful" activity there.
Mobile communications, about 27 percent of sales, showed "good performance," Tchurk said, with the most progress in 3G sales, a trend he expects to continue.
Trouble spots remain. Poor sales of wireless handsets remain an ongoing drawback for Alcatel, and though it's not clear what the company plans to do about it, Tchuruk promised some action this year. Optics, including optical networking equipment, submarine gear, and fiber, also were down, but Tchuruk said the company expects to see the sector "revive" at some point.
Meanwhile, Alcatel will continue to cut costs by closing facilities and laying off workers. Alcatel started the third quarter with about 69,000 employees worldwide, but it will end the year with fewer than 60,000.
Analysts seem pleased with Alcatel's results, if only as a confirmation that the downturn has bottomed out. "Almost all equipment stocks have surprised on the upside with regard to gross margins," write analysts Stuart Jeffrey and Matt Jones of Lehman Brothers in a note today. While expressing "disappointment" with revenues, the analysts waxed hopeful: "Much work needs to be done across the sector to get operating expenses back in line, but current indications suggest that overall profitability in the sector could exceed market expectations across the board."
— Mary Jander, Senior Editor, Light Reading