Alcatel-Lucent's revenue drops, but operating loss shrinks

Sales of fixed-line network equipment and terrestrial optical networks slowed

Alcatel-Lucent's second-quarter revenue fell 2.4 percent year on year, dragged down by slow sales in fixed-line network equipment and terrestrial optical networks, but the company reduced costs, cutting its operating loss by two-thirds compared to a year earlier.

For the full year, the market for telecommunications equipment and related services will grow, by up to 5 percent, Alcatel-Lucent forecast, although it said nothing about its own revenue growth prospects. Excluding restructuring costs and other exceptional items, the company expects to increase its full-year operating margin to between 1 percent and 5 percent, compared to 0.7 percent in the second quarter, it said.

"We expect a strong second half," CEO Ben Verwaayen said in a telephone interview.

Revenue for the second quarter totalled €3.81 billion (US$4.65 billion as of June 30, the last day of the period reported), down 2.4 percent from €3.91 billion a year earlier. Operating losses narrowed to €45 million from €130 million, which the company attributed to its ongoing cost-cutting program.

Alcatel-Lucent reported a net loss of €184 million for the second quarter, an improvement on the loss of €515 million in the preceding quarter, but worse than the €14 million net profit reported a year earlier.

However, Alcatel-Lucent said that the numbers it reports don't give a true picture of the company's transformation. Excluding restructuring costs related to the 2006 merger of Alcatel and Lucent Technologies, and certain other exceptional items, the company said adjusted operating income rose to €28 million, from a loss of €62 million a year earlier. That's significant, said Verwaayen, because it's "the first time for a long time" that the adjusted figure is positive.

Revenue from Alcatel-Lucent's network equipment business fell 3.4 percent to €2.3 billion. Within that, wireless equipment revenue rose 5 percent to €1.02 billion, but optical equipment revenue dropped 13.6 percent to €622 million and fixed-line network equipment fell 13.7 percent to €366 million.

The slowdown in sales of legacy ADSL (Asymmetric Digital Subscriber Line) equipment was compensated by an increase in IP (Internet Protocol) systems, up 11.2 percent to €318 million.

"You see a massive change in the products and services we sell," Verwaayen said.

Where two years ago the company focused on mature, wireline technologies, "Today it's about high-leverage networks, IP end to end in optical, in wireless, in services," he said.

That end-to-end view of the network means there is still a future for the company's enterprise telephony business, he said. "Traditional telephony is changing into an IP business. We have done very well in transition mode. This is an important part of the story: You have to have IP end to end. ... They are doing a very good job for us."

Verwaayen sees a bright future for Alcatel-Lucent's IP Multimedia Subsystem (IMS) products. "I think IMS is going to fulfill its promise. We see many markets coming," he said. Earlier this week the company announced a new contract to supply IMS equipment to China Mobile, the world's largest mobile operator. China Mobile will be able to offer in-call sharing of images and video, presence-enhanced contact management and unified messaging across mobile and fixed devices using the equipment, Alcatel said.

Alcatel-Lucent's second-quarter services revenue remained stable at €883 million, while applications revenue rose 5.8 percent to €489 million.

The company saw inventory build up in the second quarter, but that was a deliberate move to ensure the company can respond to customer demand in the second half, rather than a sign that second-quarter sales were slower than expected, Verwaayen said.

"In Q1, we said 'Oops, we have component issues.' Unfortunately, we couldn't serve customers to the extent that we should," he said. "We still have component issues. In an unconstrained market, we would have done even better."

Those component shortages were not in custom components such as chips, but "in the lower-tech stuff that everyone else uses," Verwaayen said.

Peter Sayer covers open source software, European intellectual property legislation and general technology breaking news for IDG News Service. Send comments and news tips to Peter at peter_sayer@idg.com.

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