AlcaLu CEO Sees a Bright US Market

Alcatel-Lucent (NYSE: ALU) CEO Ben Verwaayen had a very clear message for analysts and investors on Thursday's second-quarter earnings conference call: We are not Cisco Systems Inc. (Nasdaq: CSCO) or Juniper Networks Inc. (NYSE: JNPR).

He didn't actually name those companies, reminding his audience that he never comments on competitors. But he is clearly miffed that, despite what looked like a positive set of numbers for the company's latest three-month period, AlcaLu's share price lost about 10 percent of its value on the Paris exchange Thursday morning because of concerns about operating profit margins and a weaker market in the U.S. for IP router vendors. (See AlcaLu Grows But Pressures Weigh and Juniper Darkens 2011 Outlook.)

In fact, Verwaayen repeatedly stated that he expects North America, which generated revenues of €1.55 billion (US$2.2 billion) for AlcaLu in the second quarter, to remain a strong market for AlcaLu. CFO Paul Tufano noted that the vendor's two biggest customers, AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), are in the U.S.

"It's clear that some customers will take a good look at their capex. But if we look at the projects we have in place, the customers and the portfolio, I have no hesitation in saying that the U.S. will remain strong for us," stated Verwaayen.

"I'm not saying anything [about other companies]. ... I am saying that given what customers have shared with us, we are confident. We are expanding our customer base and not just in the cable market," but in other areas that need new technology too, such as safety. "In our addressable market, with our customers, we have a very clear and positive picture. It's strong."

In CDMA, the CEO stated that AlcaLu has very good visibility into customer plans: "There are no surprises. ... We know what's going in." Optical networking, backhaul and developments in the application layers at U.S. carriers also contribute to a promising outlook, he added.

Verwaayen also said AlcaLu remains confident in the strength of the IP market, which delivered second-quarter revenues up nearly 28 percent compared with a year ago, at €406 million ($584 million). That momentum will be further driven by the recent 400Gbit/s chip developments, he believes. (See AlcaLu Issues 400G Router Challenge and AlcaLu's IP Router Sales Soar.)

"In IP, we have taken market share. We started [growing] outside the U.S., in Europe and Asia/Pacific and only in the past 18 months have we gained enormous traction in the U.S. and that traction will continue," stated the CEO.

"Optical goes hand-in-hand with IP. We have a similar approach. ... [We] will expand the product portfolio. ... The order book is very strong," added Verwaayen.

As for the margins, Verwaayen and Tufano noted that the company is still on track, in their view, to grow faster than the addressable market and reach adjusted operating margins of more than 5 percent of 2011 sales. The adjusted operating margin (which excludes one-time charges) in the second quarter was 2.8 percent.

At least one industry analyst thinks that the AlcaLu team's protestations are falling on deaf ears, hence the slide in the share price. "The Q2 results are a set-back for investors," stated Jefferies & Company Inc. analyst George Notter in a research note issued today. And in terms of Verwaayen sticking with the full-year guidance, "we see a credibility gap forming with investors on this front," Notter wrote.

That gap resulted in AlcaLu's share price on the New York Stock Exchange falling by 78 cents (15.9%) to $4.13 in early trading Thursday.

The next six months could prove Verwaayen right and investors wrong. Alternatively it could make for some very interesting investor meetings when the full-year 2011 results are revealed next February.

— Ray Le Maistre, International Managing Editor, Light Reading

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