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Mobile Weakness Marks AlcaLu Malaise

A slump in revenues from GSM and WCDMA (3G) mobile infrastructure is at the heart of the current profit warnings from Alcatel-Lucent (NYSE: ALU), according to industry analysts. (See Alcatel-Lucent Suffers Q1 Slump.)

The vendor will provide more detail on individual business divisions when it releases its full first quarter earnings report on May 11, but in its preliminary statement Tuesday, CEO Pat Russo noted that "our first quarter results were impacted by lower volumes in traditional wireless and core networks at a time when considerable investments were made in the next generation of these technologies."

Analysts believe Alcatel-Lucent is struggling to compete with its main competitors, Ericsson AB (Nasdaq: ERIC) and Nokia Networks , in the GSM (2G) infrastructure market, where the GSM access equipment developed by Alcatel is being marketed, and in the all-important WCDMA (3G) market, where the vendors are fighting hard to become the preferred suppliers of the latest HSPA (high speed packet access) equipment. (See What Price Mobile Broadband? and Will the Real 3G Please Stand Up?)

The importance of the WCDMA market led Alcatel to acquire Nortel Networks Ltd. 's 3G access business, a transaction begun even before the merger with Lucent was completed, and it is currently replacing 6,000 Alcatel 3G base stations (now a discontinued product line) with the systems it bought. (See Alcatel Snags Nortel 3G Unit and AlcaLu Makes Product Cuts .)

In addition, Alcatel-Lucent also has the WCDMA gear developed by Lucent, which is being maintained for the one major customer, Cingular Wireless , now part of AT&T Inc. (NYSE: T). (See Mobile Matters: 3GSM Snippets.)

Alcatel-Lucent has said it will streamline its portfolio, and develop a single line of next generation mobile access infrastructure, but a timetable for that process hasn't been made public.

But analysts believe the GSM line isn't competitive enough, especially in emerging markets where the competitive threat is intensified by Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), and that the vendor's 3G strategy is still unclear.

Commenting on Alcatel-Lucent's first quarter revenues shortfall, the analyst team at Dresdner Kleinwort noted that "predictably, the most serious derailment is observed within wireless, where Alcatel-Lucent is hurt by an inability to compete for GSM contracts in emerging markets and restore confidence in the rather opaque WCDMA product roadmap."

The Dresdner analysts added in their research note: "We now see wireless sales slumping by 30 percent in the first quarter to a shade above €1 billion [$1.36 billion], with particular dire developments in GSM/WCDMA, which, at just around €400 million [$545 million], is quickly becoming marginalized vis-a-vis the likes of Ericsson and Nokia."

The latter just announced first quarter mobile network infrastructure sales of €1.7 billion ($2.3 billion), but Nokia is also feeling the pinch. (See Nokia's Network Margins Take a Hit.)

The remainder of Alcatel-Lucent's estimated €1 billion in wireless sales comes from CDMA wireless infrastructure, in which Lucent was the market leader. However, that's a market widely believed to be in decline. (See Could CDMA Hurt Alcatel Lucent?.)

It's the GSM situation that concerns Nomura Securities analyst Richard Windsor, though. He noted that "GSM in emerging markets looks like it has been particularly weak… we think that Ericsson has been piling on the pressure and gaining market share."

Windsor writes, in a note to clients, that "Ericsson's superior scale means that it can undercut Alcatel-Lucent and still make superior margins in a similar way that Nokia can in handsets." Ericsson, he concludes, is "using its size to crush Alcatel-Lucent's much smaller GSM business."

And scale is exactly what vendors need to stay afloat in this market, according to Gabriel Brown, Chief Analyst, Unstrung Insider. "There's very little profit to be had in wireless infrastructure these days, and the only way around this is to become bigger and more efficient, and expand the services side of the business," he noted recently. "Hence the vendor mergers."

— Ray Le Maistre, International News Editor, Light Reading

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