Alcatel-Lucent warned financial markets this week that it no longer believes it will reach its previously stated financial targets for the full year.
Revising its 2007 revenue outlook downward for the third time this year, the world's leading telecommunications equipment provider said it now expects growth to remain flat to slightly up at constant euro-dollar exchange rates. The last time out, Alcatel-Lucent had said it was looking for revenue to grow this year "in the mid single digits."
"Given ongoing dynamics in the rapidly changing telecom industry, the company is taking steps to accelerate the execution of its current restructuring program and to implement additional focused cost reduction plans in markets which require further actions to be taken," said Alcatel-Lucent CEO Patricia Russo.
Weakness in North America
In the wake of the merger of Alcatel and Lucent last year, the wireless telecom market has been rocked worldwide by declining orders, falling prices, and rising costs. Alcatel-Lucent said it no longer expects to see the projected volume changes that it had previously anticipated would mitigate the ongoing pressures that the company faces.
Alcatel-Lucent said its latest revenue revision is based on the takeaways it had gleaned from the company's latest round of talks with its wireless customers in North America. The company said it expects to see reduced capital spending from its North American customers through the remainder of 2007.
The big investments going into wireless in the region are for the most part being targeted at high-speed deployments, such as Sprint Nextel's new Xohm WiMax venture, but analysts say Alcatel-Lucent's main strength is in the previous-generation CDMA technology that eventually will be replaced by faster technologies.
"Neither Ericsson nor Nokia Siemens Networks shares were markedly affected by the announcement, so this appears to be an Alcatel-Lucent phenomenon," noted UK-based research firm Ovum. "Unfortunately for Alcatel-Lucent, our forecasts predict that capex among North American mobile operators will fall by 1 percent between 2007 and 2012," Ovum said. "Therefore, reduced spending is unlikely to turn around quickly and Alcatel-Lucent must be proactive in its response."
Challenging Market Environment
In other world regions, the company said that its business performance -- particularly in its wire-line, broadband, and enterprise segments -- was proceeding as previously expected. In particular, the company singled out its revenue performance in the Asia-Pacific region, which "continues to be strong."
But the company's financial prospects were further dimmed last month when Judge Rudi M. Brewster overturned a $1.52 billion jury verdict from last March that would have penalized for violating two Alcatel-Lucent patents governing the MP3 file format. Alcatel-Lucent said it intends to appeal the judge's decision.
Alcatel-Lucent currently estimates that its third quarter revenue will grow slightly at a constant euro-dollar exchange rate compared to the prior reporting period. The company also said it expects operating income to come it at the break-even point. However, it still expects revenue in the year's final quarter "to ramp up strongly" in comparison to the prior quarter, driven by the IP transformations and broadband deployments that its customers are currently implementing.
Although the company continues to acknowledge that it is competing in "a challenging market environment," its executives continue to express their confidence that the company has the right combination of people and assets to remain a "leading player in the industry."