Alcatel-Lucent Warning Highlights Need to Diversify Business

NEW YORK -(Dow Jones)- Alcatel-Lucent's profit warning Thursday reflects how far U.S. wireless companies have come in upgrading their networks - and how much farther telecom equipment suppliers have to go to grow their business.

With a couple major third-generation wireless infrastructure projects nearing completion in the U.S., service providers appear poised to reduce their capital investments. And with fewer U.S. wireless companies to serve and rising competition from Asian suppliers, the growth in the telecom equipment business is coming from emerging markets.

"As a company, [Alcatel-Lucent] needs to diversify their revenues and go into markets that are expanding and are still in their upgrade cycle," said RBC Capital Markets analyst Mark Sue, citing emerging markets in Asia and parts of Europe.

The Paris-based telecommunications vendor cut its full-year revenue forecast - for the third time this year - based on discussions with North American vendors. Alcatel-Lucent warned that it expects revenue to be flat to slightly up at a constant euro/dollar exchange rate for the year. The company also expects its third-quarter operating profit to be "around break-even."

Alcatel-Lucent insists its market position isn't eroding.

"In discussions with our customers, it became clear that there would be less spending than we had anticipated, not because we're losing share, not because we're not executing," Chief Executive Patricia Russo said in an interview with Dow Jones Newswires. "We believe that it's a market spend question for us across a number of customers in North America."

Alcatel-Lucent spokeswoman Mary Lou Ambrus added, "We're not seeing the increase in volume we had anticipated."

The continued struggle at Alcatel-Lucent illustrates the difficulty in the telecom vendor business, which necessitated the trans-Atlantic merger in the first place. Many of its customers are merging, increasing their pricing power at the expense of companies such as Alcatel-Lucent.

In addition, Asian start-ups such as ZTE and Huawei Technologies are squeezing the traditional players. In the first half of the year, ZTE reported first-half revenue rose 44% over a year ago. Last month, Nokia Chief Financial Officer Rick Simonson noted that its Nokia-Siemens joint venture has performed weakly and that the pricing was unstable partly because of pressure from China's Huawei.

Spending Slowdown

Verizon Wireless and Sprint Nextel have spent the last few years upgrading their wireless networks to a third-generation standard called EV-DO. The carriers have most recently worked on another upgrade of EV-DO called Revision A.

But Sprint and Verizon Wireless - jointly owned by Verizon Communications and Vodafone Group - are nearing completion of those upgrades, leading many analysts to speculate on the prospects of lackluster spending down the line.

"We see Verizon and Sprint as pulling back on spending now that the nationwide network is completed, with only capacity adds and software releases to be purchased," Bear Stearns analyst Phil Cusick said in a note on Thursday.

Verizon, however, doesn't agree.

"We continue to spend money on our network," said spokesman Nancy Stark, noting that the company has spent more money in the first half of the year than the same period a year ago.

Cusick, meanwhile, said Sprint's recent problems may have also be a factor. "Sprint could also be pulling back due to weakness in its operations," he said in a note.

Sprint spokesman James Fisher declined to comment on the Alcatel warning. But he noted the company recently reiterated its capital expenditure estimate of $7.2 billion.

Other companies will likely feel the impact of any slowdown. Nortel Networks has a strong presence in the wireless technology that Sprint and Verizon Wireless use, and provides EV-DO equipment. A spokesman declined to comment. Nortel fell 3% to $16.58.

Andrew Corp., meanwhile, is another potential victim. Roughly 40% of its revenue is derived from the North American market. It also sells equipment to Alcatel-Lucent. An Andrew spokesman declined to comment. Shares slipped 9 cents to $13.97.

Another large Alcatel-Lucent customer is Powerwave Technologies, which provides power converters to Alcatel-Lucent's equipment and also generates a significant chunk of its revenue from North America. A spokesman for the company wasn't immediately available for comment. Shares of Powerwave fell 2.5% to $6.64.

An Upbeat Rival

Alcatel-Lucent's comments run counter to Ericsson's more upbeat tone following a recent investor event. Analysts point to Ericsson's more geographically diversified business, which has a presence in the faster growing emerging markets.

"They're talking about the resurgence of market growth," said Bill Choi, an analyst at Jefferies & Co. "Some of it is where your business is."

In the emerging markets, equipment is needed to build out an entire infrastructure. This presents a lucrative opportunity for vendors, but one in which Alcatel-Lucent hasn't made a strong push in.

Shares of Alcatel-Lucent recently were down 8.3% to $9.21, while Ericsson rose 1% to $39.61.

An opportunity remains in North America with AT&T. The company is currently undergoing a 3G upgrade of its own, and vendors have been eagerly anticipating the pick-up in spending.

"Alcatel-Lucent's reliance was a little too heavy on (AT&T)," Sue said.

AT&T couldn't be reached for comment. But the company will likely be pushing its 3G network hard given the criticism its 2G network faced following the debut of the Apple iPhone.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

-By Nicole Urbanowicz, Dow Jones Newswires; 201-938-5460; nicole.urbanowicz@dowjones.com

(Jethro Mullen contributed to this story.)

(END) Dow Jones Newswires

Posted to the site on 13th September 2007