ALU sticks to turnaround pledge despite big Q2 loss

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ALU sticks to turnaround pledge despite big Q2 loss

Component shortages and Asian weakness hit figures but north America strong

By CAROLINE GABRIEL

Published: 30 July, 2010

READ MORE: Financial | Alcatel-Lucent

Alcatel's Lucent's Ben Verwaayen is an impressive CEO, but his comments during earnings calls are getting repetitive. He insisted that a growing order book would boost earnings during the second half of the year, but in the wake of a bigger than expected loss for the second quarter, this was sounding too much like 'jam tomorrow but never jam today' for many investors.

The net loss was €184m, reversing a profit of €14m in the year-ago quarter. Analysts had expected the deficit to be far smaller, around €146.2m, according to a Bloomberg poll. Revenue fell 2.4% year-on-year €3.81bn, but was up 17.4% on the first quarter of 2010. The sales decline was better than the figures seen at NSN (5%) or Ericsson (8%), but well behind the forecast sales growth of 20% at Huawei. Gross profit of €1.38bn was around 36% of revenues and better than expected.

Verwaayen stuck by full year forecasts, saying: "As sales trends continue to improve and we continue to see the benefits of our actions on costs, the leverage effect at the operating profit level will be significant." He also said ALU expects to generate an operating margin between 1% and 5%, and that it predicts the telecoms equipment market will see 5% growth overall this year. This margin prediction cheered analysts, as it had seemed unattainable after a poor Q1.

There were some good indicators, which put some weight behind Verwaayen's stubborn optimism. In particular, ALU enjoyed strong sales in north America, where carrier spending has recovered from recession more quickly than anywhere else. It has a position in both the major US LTE plans, along with Ericsson, and was recently named a core supplier for AT&T's IP, Ethernet and packet core business. North American revenue jumped almost 24% to $1.94bn, but Asia-Pacific sales plunged 25.6% to $833m.

However, it also faces stronger competition in the north America region. Former arch-rival Nortel had been virtually taken out of the game by its bankruptcy but has now been acquired and rejuvenated by Ericsson in the CDMA, LTE and GSM markets. And Nokia Siemens may perform the same favor for Motorola after it finalizes its purchase of the US firm's networks business.

Like NSN, ALU suffered from shortages of key components, and had to eat into its limited cash reserves to jumpstart component production and also delay some shipments. The supply chain is struggling to recover after cutting back drastically during the recession. These problems would not be addressed in the next 90 days, warned Verwaayen. "I think we have come up with a way to handle it better," he said, outlining plans to work closely with suppliers to build reduced inventories.

"We had to consume cash as we brought more components in house to create buffer of stocks," said CFO Paul Tufano. "But we were able to satisfy more demand than we had initially hoped for in the quarter and drive the revenue numbers up. We are also increasing our inventory in anticipation of strong customer demand in the second half." Cash was slashed by 79% to end the quarter on $139m.

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