The telecom equipment maker has been hurt by a weak dollar and a lack of competitiveness in wireless. But the outlook for the sector overall is stronger
In an industry buffeted by slowdown, Alcatel-Lucent may be taking more than its share of lumps.
The world's largest maker of telecom gear on Apr. 30 reported a larger decline in sales than analysts were expecting and forecast a full-year drop in revenue. The Paris-based company blamed weakness in the U.S. dollar, which erodes the value of sales in the U.S. Excluding currency swings, sales would have risen 6.3%, Alcatel said.
Still, Alcatel is faring worse than other telecom equipment makers, keeping pressure on company CEO Patricia Russo to turn the company around. While Alcatel has focused on the 2006 Lucent acquisition, its rivals have been introducing new products and grabbing share from companies such as Nortel Networks (NT) in the fast-growing wireless market, where Alcatel lacks key products. Alcatel (ALU) shares slipped 5.5% on the New York Stock Exchange.
Help from Undersea Cable
On Apr. 25, Ericsson (ERICY) reported a 5% increase in quarterly sales, despite weakness in the U.S. dollar that affected its business, too. Demand for key wireless equipment "remains healthy, and the business activity is increasing, particularly in India and China," Ericsson said at the time. On Apr. 30, telecom components supplier JDS Uniphase (JDSU) missed investors' fiscal third-quarter revenue expectations, but showed sales growth of 6.1%. Cisco Systems (CSCO) is expected to report a 9.5% increase in sales when it reports fiscal third-quarter results later this month. "It's not the case of the overall industry ailing," says Ray Mota, an analyst at Synergy Research. "Other companies have done well, while Alcatel has not."
Indeed, Alcatel Lucent expects 2008 revenue to decline "in the low- to mid-single digit range" even as the larger industry is expected to expand. Global spending on wireline telecommunications equipment is expected to rise 5.3% this year, after a 2% increase in 2007, according to telecom researcher Ovum. Spending on wireless gear is due to rise 2.2% this year, Ovum says. Even accounting for the dollar's weakness, Ericsson and Nokia Siemens, a joint venture of Nokia (NOK) and Siemens (SIE), expect flat sales in 2008.
Despite rising oil prices and a growth slowdown in the U.S. and other countries, some areas of telecom spending are showing signs of revival. While corporate customers are talking about potential budget cuts, "I've not seen much of a slowdown," Mota says. Telcos and others are building new undersea cable networks, designed to transport massive amounts of data between continents—and that's a market where Alcatel has traditionally been strong. In February, search giant Google (GOOG) and five other companies said they will build a $300 million undersea cable linking the U.S. and Japan. In March, telcos AT&T (T) and NTT DoCoMo formed an undersea cable venture. The market for undersea gear is expected to rise 12% this year, after a 4% decline last year, according to consultancy WinterGreen Research.
Spending on next-generation wireless equipment is also expected to increase. Companies such as Verizon Wireless will be spending billions of dollars in the coming years on wireless broadband technology called Long Term Evolution (LTE). That helps explain why sales of next-generation wireless infrastructure are expected to rise 12% this year, to $96 billion globally, according to WinterGreen Research. Ericsson and Nokia Siemens together have 80% share of the market. Alcatel holds 9% of the market, WinterGreen says.
Problem is, Alcatel is missing a key next-generation wireless product that's designed to link next-generation with older wireless networks. It's due later this year, but that may be too late, some analysts say. "My worry is, why would operators wait for a product—and a product that's unproven," says Clara Van Der Elst, a London analyst with Standard & Poor's.
Meantime, Alcatel is grappling with high-level departures. In January, the head of the company's services business, John Meyer, jumped ship to become a CEO of a smaller company. Chief Financial Officer Jean-Pascal Beaufret left in a management shake-up last year. Some analysts speculate that if the company's performance doesn't improve soon, Russo may be headed for the exits, too. "I think [Russo's position] is shaky," says Van Der Elst, who has a sell rating on the stock. "She's had a lot of management turnover. Some really good people left in the past few months."