AlcaLu's Q2 Dragged Down by CDMA

Whoever replaces Pat Russo as CEO of Alcatel-Lucent (NYSE: ALU) will need a clear head and a strong constitution to deal with the market conditions facing the vendor, which today reported its sixth straight quarter of net losses. (See Russo, Tchuruk Out at Alcatel-Lucent and AlcaLu Reports 2Q08.)

Two main factors are making it hard for the company to break that worrying trend: The ongoing weakness of the dollar against the euro; and the vendor's continuing woes in the CDMA infrastructure sector.

There's nothing Russo and her team can do about the former, which, with about half of the company's revenues booked in dollars or dollar-linked currencies, is hitting the company's numbers hard. But the latter must be weighing heavy on their minds, as well as the company's top and bottom lines.

AlcaLu noted that "the CDMA activity declined at a higher pace than the company had planned. This was due, to a large extent, to a strong reduction in the capital expenditure of a key customer in North America. Although there are new opportunities in other geographic areas, the uncertainty regarding spending in North America has led the company to take more cautious mid-term assumptions in this activity."

That caution has resulted in a non-cash impairment charge of €810 million (US$1.28 billion) against the CDMA business, which was also written down in the fourth quarter of last year. (See AlcaLu Reports Q4 Loss of €2.6B.)

That one-time charge pushed AlcaLu's net loss for the second quarter to €1.1 billion ($1.73 billion), or €0.49 per share. Excluding that writedown, and some smaller charges related to the ongoing Alcatel/Lucent merger process, the company's second-quarter adjusted net loss was €222 million ($349 million), or €0.10 per share.

Revenues were €4.1 billion ($6.45 billion), down 5.2 percent compared with a year earlier, and up 6.1 percent from the first quarter. (See AlcaLu Posts Loss, Warns on Full Year.)

The vendor also calculated its revenues on a constant currency basis –- that is, as if the euro/dollar exchange rate were the same as a year ago. At that constant exchange rate, revenues grew 1.7 percent year-on-year and 8.5 percent sequentially.

But even at that artificial exchange rate, AlcaLu's carrier business still suffered a 3 percent decline in revenues year-on-year. In real terms, the Carrier division's revenues of €2.8 billion ($4.4 billion) were down 9.4 percent compared with a year ago. (See Table 1.)

Table 1: Carrier business drags down AlcaLu's revenues
Business segment Q2 2008 revenues* Q2 2007 revenues* Year-on-year change Q1 2008 revenues* Sequential change
Carrier 2,811 3,104 -9.4% 2,700 +4.1%
Enterprise 386 376 +2.7% 382 +1%
Services 818 750 +9.1% 679 +20.4%
Others and eliminations 86 96 -10.4% 103 -16.4%
Total 4,101 4,326 -5.2% 3,864 +6.1%
* All revenues in millions of euros
Source: Alcatel-Lucent

Discounting the one-time charges, the net loss was not a surprise, and the company's revenues are in line with expectations. Investors appear to like the news that a new chairman and CEO are to be installed, as AlcaLu's share price is up 3.5 percent at €3.97.

European worries, wireless hope
And things could be about to worsen still further.

Commenting on the outlook for the rest of the year, Russo, in a prepared statement, noted that during "the past three months, the global macroeconomic environment has further deteriorated and the economic slowdown has begun to spread to Europe. Although not evident yet, we believe this could impact somewhat the capital expenditure decisions of certain European customers, especially in fixed access."

But there's talk of growth in the company's non-CDMA wireless business. The vendor notes "stronger-than-expected demand for GSM/W-CDMA mobile access in emerging markets, especially in Asia. In addition, we feel positive about our prospects in China, both in 2G and 3G (including CDMA EV-DO) for the fourth quarter and next year." (See China Telecom Unveils CDMA Plans.)

The vendor expects its third-quarter revenues to be flat or slightly down compared with the second quarter, while a "strong ramp" in fourth-quarter sales is expected, in line with seasonal trends.

Services bright spot, carrier pressures
The vendor's Services division was the star of the second quarter, with revenues up 9.1 percent year-on-year and up 20.4 percent sequentially at €818 million ($1.3 billion). And the company expects that trend to continue in the coming quarters: "We now see a stronger than initially expected demand in Services, especially in network operations and network integration," the vendor noted.

The Carrier division is under pressure in more than just the CDMA sector, though. AlcaLu noted that revenues from fixed access products declined "at a double-digit rate, due to the ongoing decline in new subscribers to copper-based broadband access. Alcatel-Lucent shipped 7.7 million xDSL ports in the quarter, down 20% from the demanding basis of the year-ago quarter but up 16% sequentially."

In addition, IP routing sales didn't grow as fast as they did during the first quarter, though the vendor's optical sales grew at a double-digit rate, "driven by submarine activities and wireless transmission."

The strength in optical wasn't enough to keep the wireline business from recording a year-on-year fall in sales. (See Table 2.)

Table 2: Wireless hits Carrier Group's performance
Carrier Group division Q2 2008 revenues* Q2 2007 revenues* Year-on-year change Q1 2008 revenues* Sequential change
Wireline 1,533 1,612 -4.9% 1,376 +11.4%
Wireless 977 1,184 -17.5% 1,086 -10%
Convergence 324 328 -1.3% 261 +24%
Others and eliminations -23 -21 NA -24 NA
Total 2,811 3,104 -9.4% 2,700 4.1%
* All revenues in millions of euros
Source: Alcatel-Lucent

— Ray Le Maistre, International News Editor, Light Reading

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