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Alcatel Battles Margin Pressures

Ray Le Maistre
4/27/2006

Alcatel (NYSE: ALA; Paris: CGEP:PA) saw its share price fall in Paris and New York today as higher than expected costs and price pressures, especially in its mobile infrastructure division, left operating margins short of Wall Street's expectations. (See Alcatel Reports Q1.)

The news comes just two days after Alcatel's bride-to-be, Lucent Technologies Inc. (NYSE: LU), also disappointed the financial markets with its first quarter results. (See Lucent Plays Waiting Game in Q2 and Alcatel, Lucent Seal Deal.)

Alcatel posted first quarter revenues of €3.07 billion ($3.85 billion), up 17 percent compared with a year earlier, and net income of €104 million ($130 million) for an EPS (earnings per share) of €0.08, compared with €124 million ($155 million) and an EPS of €0.09 a year ago. The profit numbers were hit by higher costs, including taxes.

Alcatel's share price fell €0.85, nearly 7 percent in Paris, to €11.63 in Paris, and by more than 5 percent in New York, where it dipped $0.72, nearly 5 percent, to $14.60.

In a research note issued today, Nomura Securities analyst Richard Windsor says that while revenues were slightly ahead of expectations, gross margins, at 34.9 percent, were "a little disappointing."

Windsor notes that while Alcatel's fixed line equipment business performed well, the mobile infrastructure unit suffered from "competitive pricing pressure, investments in new technologies and lower revenues," and as a result "profitability was significantly worse" than expected. The unit recorded operating profits of just €57 million, or 6.3 percent of the €908 million in revenues.

The fixed line business, though, with operating profits of €110 million ($137.9 million), 8.6 percent of the near €1.3 billion ($1.63 billion) of revenues, exceeded expectations. "Business is going from strength to strength... The outlook for this division remains strong," writes Windsor.

Things are going particularly well for Alcatel's IP router business. During today's conference call, the vendor's COO, Mike Quigley, said the vendor now has 130 customers for its IP equipment, and that 28 new contracts were signed in the first quarter. (See Alcatel, ECI Land DT Gig.)

Without citing any specific financial numbers, Quigley said IP router sales in the first quarter were 10 times higher than a year earlier, and that Alcatel was now the number two player globally in the IP router market with a 25 percent share in the fourth quarter of 2005. The company recently launched a new product in this sector, though it still seems to be deployed by just the one customer, Telecom New Zealand Ltd. (NYSE: NZT; New Zealand: TEL). (See Alcatel Shrinks Access Router, Alcatel Unveils New Router, and Alcatel Touts IP Edge Share.)

First quarter sales of DSL equipment were also strong, with Alcatel shipping 6 million ports, an increase of more than 50 percent over the 3.9 million ports shipped a year earlier. IP DSLAM sales are ramping up as part of that growth, with 90 customers now using the latest models. Quigley said the expectation for the global DSLAM market is that 70 million lines would be shipped in total (by all vendors) in 2006.

The COO also noted increasing traction in the firm's IMS (IP Multimedia Subsystem) technology, and said it now had IMS elements installed in 60 live networks. But CEO Serge Tchuruk noted on the call that it would be 2007 before any substantial revenues would be generated by IMS products.

The Alcatel executives declined to comment on issues related to the planned merger with Lucent, though Quigley, in response to analyst questions, said both companies would support all their customers and the products they currently use. "We won't put any customers in any difficulties" by discontinuing product lines, though he added that the plan was to "help customers onto the best platform" that suits their needs over time.

— Ray Le Maistre, International News Editor, Light Reading

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