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Online Video Beneficiaries: Alcatel?

Posted on Monday, Sep 24th 2007

In the past few posts, we have looked at Cisco and other networking players in the series of posts on Online Video Beneficiaries. In this post, we will look at Alcatel-Lucent.

Alcatel-Lucent (Euronext Paris and NYSE: ALU) is a leader in fixed, mobile and converged broadband networking, IP technologies, applications, and services with revenues of €18.3 billion in 2006. The merger between Alcatel and Lucent happened in December, 2006 and provided Alcatel with a foothold in the US market and an expanded product portfolio as well as a combined treasure of 25,000 patents. It also acquired Nortel’s universal mobile telecommunications system (UMTS) operations in January 2007. Alcatel-Lucent is organized around five business groups: Wireless, Wireline, Convergence, Enterprise, and Services Business Groups.

The Wireline Business Group makes Alcatel-Lucent a market leader in the most significant areas of broadband access and triple play/IPTV networks. Alcatel is the leader in the optical networking market with 20% market share. It is at the second position behind Cisco in the IP edge routing market with 24% market share. It has a broad portfolio of products that range from DSL to FTTx to optical metro and long-haul networks to carrier Ethernet and edge routing solutions.

The Enterprise Business Group is a leading provider of solutions such as unified communications and contact centers, IP telephony, IP address and performance management software, and security solutions. In Q2 2007, Alcatel-Lucent acquired NetDevices, which delivers Unified Service Gateway, a networking platform for managing branch office networks.

On the financial front, Alcatel-Lucent reported revenues of €4.33 billion in Q2 2007, a sequential increase of 13% from €3.88 billion and a year-on-year decrease of 3.5% from €4.49 billion. Adjusted loss for the group was at €336 million ($459.3 million) or €0.15 per diluted share, against a profit of €302 million the previous year. During the quarter, it reduced its cost structure in areas such as IS/IT and R&D. It has also achieved approximately 30% of its 3-year target of reducing 12,500 positions. It plans to achieve pre-tax savings of €600 million this year.

Alcatel still seems to be struggling with its merger with Lucent and the Nortel UMTS acquisition. When the Alcatel-Lucent deal was announced in April 2006, Alcatel-Lucent had a combined market value of $36 billion and its market value has fallen 43% to around $20.5 billion. Its stock is trading around $9, 36% down from the merger in December. In all, the deal seems to have diminished shareholder value, an ungainly development.

However, Alcatel’s IP/MPLS revenues were $274 million in Q2, a 60% increase over last year and it overtook Juniper for the second position in the service provider edge router market. In the overall broadband infrastructure market, Alcatel seems to have gained a strong position with its capacity to manage the integration of major triple play projects and a strong portfolio.

In my recent post on Nortel, I have said that consolidation of 3-4 dwarfs would create more efficient industry dynamics. Alcatel, however, is currently busy with its Lucent & UMTS merger integrations, and should not attempt any further large transaction until the full cost-structure re-adjustment is completed. 3Com is also busy with the integration of its H3C JV, and the only kind of transaction likely at the moment in both companies are private equity transactions. the industry consolidation, while necessary, is probably at least 18-24 months away.

Alcatel-Lucent (ALU)

This segment is a part in the series : Online Video Beneficiaries

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