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Alcatel profit falls 8% on slumping margins

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Author: WildC@rd

Net income for the second quarter fell to 180 million euros ($229 million), or 0.13 euros a share, from 196 million euros, or 0.14 euros a share, a year earlier. Profit for the French firm was padded by a gain of 12 million euros related to the sale of fixed assets. Alcatel pre-announced revenue figures at the time of Lucent's sale and profit warning. Sales rose 8% to 3.38 billion euros, in line with expectations, driven by strong growth in North America and China. Gross margin, however, declined to 33.6% from 35.6%. Intense price competition is hitting margins across the industry as lower-priced Chinese vendors seek to build positions in new markets and move aggressively to gain market share. Alcatel's operating margin came in at 7.8%. Alcatel (FR:013000: news, chart, profile) (ALA : , , ) shares fell 3.5% in Paris morning trading. Also see Europe Markets. "With the industry consolidation gaining momentum, the wireless market environment becomes even more competitive as some players are aggressively trying to reposition themselves," Alcatel Chief Executive Serge Tchuruk said in a statement. In the third quarter, Alcatel expects operating profit at around the same level as in the second quarter on sales in the mid-single-digit range. Alcatel said it sees the carrier market growing in the mid-single-digit range in 2006, but didn't provide specific guidance because of its merger with Lucent. The results failed to impress some analysts. West LB Equity Research downgraded the stock to reduce from hold, citing the weak third-quarter outlook. "The management sees the third quarter as a 'transition quarter' and its guidance indicates around 5% top-line growth, but flat operating profit," West LB Equity said. "We see this as a profit warning." Nomura analysts were more positive. "Outlook remains far better than either Lucent or Nortel, and looking at the fundamentals of Alcatel, it is clear to us that there is substantial value to be had," Nomura analysts told clients. Alcatel and Lucent April on Wednesday named Olivier Baujard, who now heads the technology department at Alcatel, as chief technology officer of the combined company. Earlier in the day Lucent reported lower third-quarter profit because of weakness in the North American operations. See more technology coverage. Lucent Chief Executive Patricia Russo said the companies "continue to make excellent progress in integration planning for our pending merger transaction." Earlier this week, Alcatel won European Union permission to proceed with the deal. Analysts have started warning about the benefits Alcatel will derive from the merger. "Regarding the quality of the purchased asset (Lucent), we believe that there is no possible denying that Lucent's operating performance has been rather dismal since the beginning of the year. Investors will doubtless be merciless in questioning Alcatel executives on the rationale behind the merger," Exane BNP Paribas analysts told clients. The broker warned that the two companies must provide some upbeat news soon "in order to soothe disgruntled investors." See more global markets coverage. Both Alcatel and Lucent still need their shareholders' approval for the merger, to be sought at extraordinary shareholder meetings in early September in Paris.
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