April 26, 2012 / 6:59 AM / 5 years ago

Alcatel-Lucent margins slip on telecoms slowdown

PARIS (Reuters) - Telecom equipment maker Alcatel-Lucent’s profitability slipped in the first quarter because of slower demand from North America and Europe and a shift to lower-margin fourth-generation mobile gear.

The shares were down over 13 percent at 0915 GMT as analysts said the poor start compared to market leader Ericsson could make it hard for the Franco-American group to hit its goal of improving margins this year.

The company sought to reassure investors by confirming its profit targets and predicting improvement ahead.

But it also swung to an operating loss after four straight quarters in positive territory and after its first annual profit last year since it was formed in a difficult 2006 merger.

“We had a slow start in a volatile environment because of lower product volumes and mix,” Chief Executive Ben Verwaayen said on a conference call on Thursday. “The European debt crisis is all around us and that has an impact. It’s a serious issue to factor in and a good reason to be cautious.”

A slowdown in spending by telecom operators globally is hurting all vendors of telecom equipment, including Ericsson and ailing Nokia Siemens Networks, just as they were recovering from the last downturn and intense price wars. The first quarter is traditionally weaker across the industry and sales fell by 18 percent for both Ericsson and Alcatel-Lucent.

But while Alcatel-Lucent’s gross margins fell and were worse than expected, Ericsson’s were better than forecasts.

“For Alcatel-Lucent, this is not a good start to the year: the economy is not helping them, especially in Europe,” said Pierre Ferragu, an analyst at Bernstein Research.

Analysts predict slower growth of 3-4 percent in the overall market for telecom network equipment, down from 7-8 percent last year.

Alcatel-Lucent revenue fell 12.3 percent in the first quarter to 3.2 billion euros ($4.2 billion), in line with analysts’ expectations.

Its adjusted operating loss was 221 million euros because of the slowdown and weaker gross margin, while net profit on a reported basis was 398 million euros, helped by the disposal of its Genesys business unit.

LOW-POINT

Paul Tufano, Alcatel-Lucent’s chief financial officer, said the first quarter should be the low-point on margins for the year.

Nomura and Barclays analysts pointed out in a research notes that Alcatel-Lucent’s gross margin of 30.3 percent was the lowest since the 2006 merger.

Key to Alcatel-Lucent’s profitability will not only be the outlook in Europe, where spending by operators fell 22 percent in the first quarter, but also the pace of U.S. operator spending on fourth-generation mobile gear.

Such 4G gear, known as LTE, is being rolled out quickly by AT&T and Verizon this year and has lower margins than the older third-generation mobile gear, known as CDMA, which has boosted Alcatel-Lucent’s margins in recent years.

The U.S. market is among the world’s most profitable for telecom gear makers because low-cost Chinese players Huawei and ZTE are effectively shut out over worries about the security of key national infrastructure.

Ericsson and Alcatel-Lucent essentially split the U.S. market between them.

Alcatel-Lucent shares had risen nearly 22 percent so far this year to 1.47 euros before today’s results, while Ericsson’s are down about 6 percent.

But Alcatel-Lucent shares remain near five-year lows, giving the group a market capitalization of 3.06 billion euros ($4.03 billion), far from its pre-merger levels of roughly $36 billion.

($1 = 0.7585 euros)

Reporting by Leila Abboud and Gwenaelle Barzic; Editing by James Regan and Matthew Tostevin

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