Alc-Luc: Tough year, but a stellar Q4

Alcatel-Lucent, the French-US network equipment provider (NEP) announced its Q4 and 2007 full-year results on Friday. What a contradiction they are. Taking it from the top, revenues in Q4 (1 October - 31 December) increased by 18% year-on-year to EUR5.2bn, whereas full-year revenues declined by 2.5% (at current exchange rates) to EUR17.8bn. Operating income in Q4 increased from a loss of EUR3 million in 2006 to a gain of EUR303 million in 2007, whereas over the full year operating income fell dramatically from EUR925 million to EUR110 million.

To say 2007 has been a difficult year for Alcatel-Lucent is an understatement. If merging two NEPs with so different a heritage (both in outlook and portfolio) were not challenging enough, a fair amount of this has had to be undertaken in the glare of publicity prompted by three financial warnings and the need for CEO Pat Russo to publicly restate the company strategy in the autumn.

The temptation is to focus on the full-year results, and judging by the early media headlines this appears to be the case. But the real story here is the turnaround in Q4. Services (Alcatel-Lucent's big hope) increased revenues by 27% year-on-year to EUR1.02 billion. Although much smaller than the traditional carrier segment, services now account for just under 20% of revenues. This is the area to watch.

The carrier segment - which is responsible for more than 70% of revenues - increased sales in Q4 by 16% to EUR3,734 million. Both wireline (due to optical networking) and wireless (strong GSM and WCDMA sales) segments showed growth to EUR1,691 million and EUR1,570 million respectively. The wireless segment had a grim first half of the year, so this is particularly noteworthy. In fairness to Alcatel-Lucent it has said this would be the case. Worryingly the operating profit on the carrier business is at EUR94m in Q4 (2.5% of revenues).

At a broader level the improving performance of wireline and wireless illustrates that the new entity has a degree of balance that their distinct predecessors both lacked. Add in the impact of the accelerated cost reduction programs and there are signs that Alcatel-Lucent may have turned the corner. It takes at least three reference points to make a trend, so the proof of this will be when the company posts consecutive sets of good numbers.

No one ever said merging these two companies would be easy, but the pain may well be worth the gain. Alcatel-Lucent's forward outlook is for the market to be flat. Given the uncertain economic outlook this would seem prudent to us. With a flat market the bigger combined group with a shared overhead will be better placed to compete effectively than if they had not got married.

Mike Cansfield, Telecoms Strategy Practice Leader