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Price pressures, merger costs hit Alcatel-Lucent

Loss bigger than expected, despite warning in April on sales prospects, as competition forces prices down.
Written by ZDNET Editors, Contributor
Telecommunications equipment maker Alcatel-Lucent produced a bigger-than-expected quarterly loss on Tuesday as pricing pressures and merger costs bit, sending its shares down 8 percent.

Alcatel-Lucent, created in December 2006 by the takeover of U.S.-based Lucent by Alcatel of France, has been struggling to win the confidence of customers spooked by uncertainty over the merged group's technology and product choices.

It already warned in April that sales could fall short of earlier targets.

In early trading on Tuesday, the company's shares were down 8.34 percent at 8.79 euros, their lowest since early April, underperforming the DJ technology sector index, which was up 0.04 percent. The stock has underperformed the index by more than 24 percent so far this year.

"We are disappointed by the potential structural nature of some of the margin pressure and this will deter potential investors for longer than we had thought," Deutsche Bank said in a note: "Alcatel-Lucent has gained market leadership for high-speed Internet fixed-line network equipment and associated services, but cutthroat competition has forced it to sell wireless network products at relatively low prices, hurting its margins." Wireless sales fell 11 percent in the second quarter while fixed-line revenues rose 3 percent.

Paris broker CM-CIC Securities said the group's second-quarter gross margin of 33.4 percent undershot its forecast of 38.2 percent and a market consensus of 36.9 percent.

Gross margin has deteriorated from 34 percent in the first quarter and 38 percent in the second quarter last year.

"It looks as if some of the savings that are made from cost-cutting are being absorbed by price pressures (particularly in the mobile equipment sector) which are worse than expected and hurting margins," said Richard Windsor, analyst at Nomura.

Wider loss
The group generated a second-quarter adjusted operating loss of $25.84 million, well below expectations of a profit of $92.2 million based on a Reuters poll.

At the net level, it produced a loss of $459.3 million against a profit of $410.7 million the previous year and forecasts of a $200 million loss.

The outcome included an impairment charge of $405.28 million to reflect a drop in the market value of third generation high-speed mobile infrastructure operations of Alcatel and those of Canada's Nortel, acquired last year.

However, the net result benefited from a $57.12 million gain from a litigation settlement and an after-tax gain of $108.8 million related to a change in pension liabilities.

Alcatel-Lucent confirmed it expected to generate $816 million in pretax savings this year thanks to the merger and had reduced headcount by 3,800 people in the year to date, or 30 percent of its three-year target of 12,500.

It said order flow was picking up and a strong ramp-up in sales in the second half would help it reach its full-year revenue growth target of about 5 percent at constant euro-dollar exchange rates.

On a sequential basis, second-quarter sales rose 13 percent at a constant euro-dollar exchange rate, beating the group's 10 percent sales growth target.

"We have made significant progress during this quarter with Asia seeing the strongest growth," Alcatel-Lucent Finance Director Jean-Pascal Beaufret said in a conference call.

But year-on-year sales in the second quarter fell to $5.88 billion from $6.1 billion.

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