As earnings reports tumbled in, equipment vendors pointed to third-generation pricing wars and the still-not-granted 3G licenses for China’s advanced network buildout as reasons for sluggish financials.
Alcatel Inc. reported strong growth in its fixed-line business during the first quarter, but intense competition in mobile network equipment sales hurt the company’s operating margin, which rose to 6.5 percent from 4.1 percent a year ago, but fell below analyst expectations of 8 percent.
The French equipment vendor posted first-quarter net profits of $129.1 million from sales of $3.8 billion. In the year-ago quarter, the company posted net profits of $129.8 million from sales of $3.2 billion.
Alcatel Chairman and Chief Executive Officer Serge Tchuruk pointed out that rising demand for “triple-play” services, combining Internet, phone and TV offerings, was responsible for driving up the company’s fixed-line equipment sales. However, the company said severe competition in sales of second- and third-generation mobile networks has led to a pricing war among equipment vendors. For the quarter, Alcatel reported $1.59 billion in revenue from fixed-line equipment, along with $1.13 billion from mobile equipment. In 2005, the company posted fixed-line revenue of $1.23 billion along with mobile network revenue of $988 million.
Regarding the company’s wireless momentum, Tchuruk said Alcatel is increasing its investment in video and mobile TV technologies.
Looking forward, Tchuruk said, “Our vision of the market remains unchanged as we move toward mid-year: We expect the carrier market to grow in the mid-single-digit range for full-year 2006. Concerning Alcatel’s businesses, we expect full-year revenue to grow above the carrier market rate, with a lower growth rate for the second half compared to the first half, as previously announced.”
Tchuruk noted that Alcatel’s plans to acquire Lucent Technologies Inc. places Alcatel at the forefront of much-needed industry consolidation, adding that the complementary geographical and technological attributes of both companies should provide enhanced earnings opportunities for the combined company. He said the Lucent deal is expected to close in the next six to 12 months.
“Alcatel is showing the state of the industry in their numbers,” explained telecom analyst Jeff Kagan. “The merger between Alcatel and Lucent will not magically make the new, larger company hot, but it may make it stronger. As the networks continue their merging, it puts pressure on the equipment side of the industry because orders stop for months or the better part of a year as inventories are taken and both sides sort through what they currently have and have on order. These are companies that are not going away because the networks will always need new gear, but during the past several years of mergers on the network side, it has been very tough on the equipment companies. These companies continue to do business, but it is down instead of up, and that trend continues through the merger wave of their customers.”
Lucent said weakened North American wireless sales coupled with the delay in China’s 3G buildout caused the company’s second-quarter earnings to fall 32 percent.
Lucent posted second-quarter net income of $181 million from $2.14 billion in revenues. The company’s revenues are down 8 percent from its year-ago quarter, when Lucent posted net income of $267 million from revenues of $2.34 billion.
Looking forward, CEO Patricia Russo said, “We expect wireless deployments in North America to build through the remainder of the year, with an acceleration in the fourth fiscal quarter around UMTS and EV-DO Rev. A deployments. We continue to expect growth across our portfolio in the Caribbean and Latin America region during the second half of the fiscal year, and we expect a ramp-up in network transformation projects in Europe as well. Offsetting these favorable trends, however, we expect a $500 million revenue decline in China and India for this fiscal year, driven primarily by declines in PHS sales and delays in the issuance of 3G licenses in China, and to a lesser extent our selective participation in highly competitive market opportunities in India.”
American Technology Research analyst Albert Lin opined that there seems to be a global infrastructure problem as Lucent blamed its weak earnings on the U.S. market, Motorola Inc., blamed China and L.M. Ericsson blamed Europe.
