Alcatel-Lucent reports weak Q2 results, sector slowdown worries increase

Reuters

Telecom equipment maker Alcatel-Lucent SA (Paris, France) reported weaker-than-forecasted results, magnifying concerns about a sector-wide slowdown and sending shares down more than 9%.

The companies weak second quarter results come after a strong start to the year as it rode a wave of operator spending in the United States. It also comes amid increasing investor worries about a possible second-half slowdown in the telecom equipment sector, especially in the United States.

Equipment makers Ericsson, Juniper and Cisco also reported weak Q2 results.

"The outlook seems challenging when one looks at peers' results published over last few days," said Pohjola analyst Hannu Rauhala.

Alcatel-Lucent CEO Ben Verwaayen downplayed concerns of a United States slowdown, saying he expected sales there to continue to be strong in the second half of the year.

"We have a very broad product base in the United States and many customers there," he said. "We are on track on our goals for the year and are growing where the market is growing."

Revenue in the second quarter was up 2.4% to $5.6 billion compared with a year earlier, and adjusted operating income was 108 million. Revenue was in line with analysts' average expectation of $5.7 billion, but adjusted operating profit was considerably below consensus of 145 million. The company also posted a net profit of $61 million this quarter after a loss last year.

Alexander Peterc, an analyst at Exane BNP Paribas, said the top-line results were a bit weak and adjusted operating profit well below consensus, despite strong sales in the United States and Asia.

"The targets for the year are still in reach," said Peterc. "We are not in the danger zone yet, but the second half has to go well and the macroeconomic environment isn't great."

Alcatel-Lucent has been riding a wave of investments by U.S. operators in like AT&T and Verizon this year, boosting its results and leading some investors to bet that Verwaayen has gotten the company on the right track after a painful merger.

Before today's results, Alcatel-Lucent's shares were up around 55% this year, compares with Ericsson's 10% rise.

Alcatel-Lucent has better margins in the U.S. market because it is effectively closed to low-cost Chinese vendors like Huawei and ZTE Corp who have been kept out of major operators' networks over security concerns.

Sales in North America in the second quarter were up 4.4% to $2.2 billion.

In the second half, Alcatel-Lucent will likely be hurt by Verizon's plan to dial back spending on its wireless network, but helped by AT&T's plan to increase investments by a billion dollars and Sprint's buildout, said analyst Alexander Peterc.

But even strong sales in the U.S. may not resolve Alcatel-Lucent's long-standing problem of cash burn. The company saw free cash flow of negative 350 million in the second quarter, and negative 213 million in the first quarter.

Nevertheless, Chief Financial Officer Paul Tufano said the company remained "very committed" to its goal of reaching positive free cash flow goal for 2011.

"We made modest progress in reducing inventory and expect to accelerate that in second half," he said. "We remain very focused on making that target."

(Additional reporting by Tarmo Virki; Editing by David Holmes and Christian Plumb)

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