Optical/IP Networks

Merger Tears Into AlcaLu's Sales

Pat Russo, CEO of Alcatel-Lucent (NYSE: ALU), told analysts and investors on the vendor's first-quarter conference call that the giant vendor, now into its sixth month of operations, is well positioned to benefit in the long-term from its scale, geographic reach, and the breadth of its fixed and wireless portfolios.

All eyes, though, are on the short-term. That's because revenues from AlcaLu's key customer base -- telecom operators -- have fallen 15 percent compared with pro forma sales a year earlier, and even fell 11 percent compared with a weak fourth quarter of 2006. (See AlcaLu Details Q1 Woes.)

The chart below shows how sales of wireline, wireless, and convergence (voice, IMS, IPTV, support systems) equipment have dropped since Alcatel and Lucent combined their businesses late last year, with mobile infrastructure sales suffering the hardest.

Table 1: Alcatel-Lucent Revenues by Business Line Q1 2006 - Q1 2007
In Euros (millions)* Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007
Carriers 3,340 3,367 3,706 3,198 2,839
- of which Wireline 1,342 1,459 1,447 1,454 1,287
- of which Wireless 1,495 1,397 1,674 1,249 1,204
- of which Convergence 503 511 585 495 348
Enterprise 342 368 362 419 371
Services 674 700 775 819 626
Other and eliminations 77 56 66 -15 46
Total revenues 4,433 4,491 4,909 4,421 3,882
* Figures for 2006 quarters are all pro forma -- what the revenues would have been had Alcatel and Lucent merged on January 1, 2006.
Source: Alcatel-Lucent

So what's behind the drop-off in sales, and will the revenues return? Well, the company is expecting a sequential 10 percent rise in revenues for the second quarter, though from a low starting point, and says it's still on course for mid-single-digit full-year growth, albeit at a fixed (not real world) €/$ exchange rate. So there are expectations of a recovery.

In wireline, the optical business is already picking up again after a turbulent few months of product rationalization, customer confusion, and the impact of major carrier consolidation in North America, Russo told today's conference call. Sales of IP equipment, such as the 7750 router, are also growing, so, unusually, it is the vendor's access products that have seen a decrease in revenues compared with a year earlier.

That, says Russo, is because the first quarter of 2006 was massive for North American DSL sales. "We are very well positioned in next-generation access networks," proclaimed Russo, adding that revenues from GPON sales would start to ramp in the second half of this year. (See Alcatel Joins Verizon PON Party and Alcatel-Lucent Wins GPON Deal.)

In wireless, CDMA sales have held up in North America but have suffered in China and Latin America, said Russo, while GSM sales suffered in emerging markets like China. In 3G, AlcaLu has been in "a transition period," as it juggles its Alcatel and Lucent 3G lines with the WCDMA access business line acquired from Nortel Networks Ltd. . (See Alcatel Snags Nortel 3G Unit.)

There are signs that AlcaLu is at least consolidating on a single 3G access platform. The company has already announced that its installed base of 3G access gear is being ripped out and replaced with superior ex-Nortel gear, as previously announced. This, the company says, is going very well, without any problems. (See AlcaLu Makes Product Cuts .)

As for the ex-Lucent 3G gear, this is now being partly replaced and partly re-engineered in the field at the one customer that deployed that line of equipment, Cingular, now AT&T Inc. (NYSE: T) of course.

Etienne Fouques, head of AlcaLu's Carrier Business Group, told today's conference call that the Lucent Radio Network Controllers (RNCs) are to be replaced with Nortel RNCs, but that the Lucent Node Bs, the base stations controlled by the RNCs, were not being ripped out and replaced. Instead, the Nortel RNCs have to be adapted "to accept the Node B of Lucent," and that this was going to take about another year to sort out.

"It will be done in the second quarter next year, and everything will be finished, replaced by compatible Nortel products, by the end of next year," stated Fouques.

The wireless business also faces a degree of uncertainty surrounding final 3G license and technology decisions in China, Russo noted, and a "challenging pricing environment."

The CEO also noted some success in the WiMax market, claiming to have been involved in 40 trials and to have already landed six commercial deals. (See AlcaLu Wins WiMax Deal.)

In the mixed bag that is convergence, sales have been affected by a continuing decline in traditional voice switches, which the company refers to as its "legacy core." Along with the TDM voice iron, this business line includes all manner of next-generation IMS (IP Multimedia Subsystem) elements, such as the vendor's VOIP systems, as well as billing platforms and IPTV systems. The company, though, won't break out any details. The statement that "revenues were stable in the IMS business" sheds little light on the business.

Russo is bullish overall, pointing to a number of major contract wins announced recently as pointers to a recovering business. (See AlcaLu Answers Outsourcing Critics, China Mobile 3G Contracts Awarded, AlcaLu Lands $6B Deal, Alcatel-Lucent Wins $600M, AlcaLu, SFR Sign Contract, Telstra Picks ALU for Subsea, and AlcaLu, NEC Win Deal.)

The CEO also insists the company's restructuring program is on track, with the company set to cut 1,900 jobs (about 15 percent of the planned total) and achieve annual operating cost savings of €600 million ($811 million) this year. (See Alcatel-Lucent Job Cull Hits 12,500.)

For some, the turbulence ALcatel-Lucent has experienced was to be expected. Prudential Equity Group LLC analyst Inder Singh wrote today in a research note: "As the largest merger in the industry's history, we have long expected 1H07 results to be uneven, but we continue to believe the combined company is very well positioned as a key long-term partner for Tier 1 carriers around the world."

— Ray Le Maistre, International News Editor, Light Reading

Sign In