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Alcatel Finally Back to Growth

Posted on Wednesday, Dec 15th 2010
Last month, Alcatel-Lucent, (NYSE:ALU), the telecommunications equipment company with annual revenue of €15.57 billion ($21.19 billion) reported revenue growth and positive net profit. The company seems to be on a strong growth curve that has also seen it gaining market share. On the other hand, Brocade (NASDAQ:BRCD), a data center networking player, reported a mixed quarter and provided a weak outlook that sent its shares tumbling. Let’s take a closer look.
Alcatel-Lucent reported third quarter revenue of €4.074 billion ($4.88 billion), up 10.5% y-o-y and 6.8% q-o-q. It swung to a net profit of €25 million ($235.6 million) or €0.01 per share ($0.10 per ADS) compared to net loss per share of €0.08 or 12 cents last year. It ended the quarter with a net debt of €190 million. By operating segment, Networks revenue was €2.459 billion, up 6.7% q-o-q and 10.2% y-o-y. Applications revenue was €499 million, up 2% q-o-q and 5.5% y-o-y. Services revenue was €948 million, up 7.4% q-o-q and 9.1% y-o-y.

Alcatel-Lucent reiterated its outlook for 2010. It said that while its supply chain is still experiencing capacity constraints, the demand for telecommunications equipment and related services is recovering owing to booming data traffic and the need to increase network efficiency. The company therefore expects nominal growth of 0% to 5% for the telecommunications equipment and related services market in 2010. The stock is trading around $3 with market cap of about $7 billion. It hit a 52-week high of $4.69 on October 7, 2009, and a 52-week low of $2.25 on May 20.

Chart forAlcatel-Lucent (ALU)

Jim Duffy on Network World reports that Cisco improved its lead in the service provider edge router market while Alcatel-Lucent overtook Juniper for the second position:

“Cisco’s share was 46% in the quarter, with revenue up 29% from last year. Alcatel-Lucent’s share was 21%, with a 26% bump in revenue. Juniper’s share was just under 19%, with revenue up 23% from Q3 2009 . . . Demand for edge routers in Q3 picked up significantly for mobile backhaul applications, according to Dell’Oro vice president Shin Umeda. Wireless service providers need IP/MPLS routers at the edge to increase network capacity for high-speed data services and growth of mobile data traffic.”

Since the 2006 merger of Alcatel with Lucent, the company has struggled to make a profit. But it has been steadily making progress under CEO Ben Verwaayen, who took the reins at the end of 2008. It finally seems to have returned to the growth track with revenue growth, positive net profit, and even market share gains.

Another networking player, Brocade (NASDAQ:BRCD), a data center networking company, recently reported fourth quarter revenue of $550 million, up 5.5% y-o-y and 9.3% q-o-q. Net income was $23 million or $0.05 per share, compared to $32 million or $0.07 per share last year. For fiscal year 2010, total revenue was $2.1 billion, compared to $1.95 billion in 2009. The company ended the quarter with cash and cash equivalents of $336 million and debt of $930 million.

For the first quarter, Brocade expects revenue of $535 million to $550 million and EPS of $0.09–$0.10 versus analyst estimates of $553.2 million and $0.12. J.P. Morgan Securities, which cut its price target on the stock to $7 from $7.50, believes that Brocade’s Ethernet federal business was the cause of the lower outlook, but greater account coverage and stabilizing relations with service providers could boost sales. Brocade’s Ethernet business contributes to about 31 percent of total revenue, with federal business contributing to about 23 percent of the Ethernet business revenue.

Despite a booming data center industry, Brocade seems to be struggling.  According to inverstment firm Oppenheimer,

“Despite its increased efforts, our checks suggest Brocade remains challenged in Ethernet. Lack of competitive solutions (outdated/uncompetitive products, portfolio gaps) and market presence are key concerns. As a silver lining, interest in Brocade’s (new) switches, which are launching this month, was positive.”

Brocade acquired Foundry and its Ethernet business in 2008 for $3 billion but hasn’t quite managed a successful integration. Following its Foundry acquisition Brocade was seen as a potential threat to Cisco, but it hasn’t been able to live up to that expectation owing to poor execution.

The stock is trading around $5 with market cap of about $2.5 billion. It hit a 52-week high of $9.84 on October 9 of last year and a 52-week low of $4.64 on August 24.

Chart forBrocade Communications Systems, Inc. (BRCD)

Brocade was rumored to be an acquisition target for the past year, and Dell and HP were seen as possible acquirers.  Dell recently acquired data storage company Compellent for $960 million. Wedbush analyst Kaushik Roy says it should acquire Brocade to compete with HP and Cisco:

“Dell needs to move up in the datacenter by providing more of its own value or IP (intellectual property). In our opinion Dell should also buy Brocade (with roughly 70% SAN switch revenues and 30% Ethernet switch revenues) to compete with HP and Cisco. Getting into networking would help Dell improve its margins.”

HP could have intensified its attack on Cisco with the acquisition of Brocade but it got distracted with a new CEO Leo Apothekar, former CEO of application software company SAP, and the bickering with Oracle. And now, even Oracle, which hired HP’s ex-CEO, Mark Hurd, is rumored to be interested in acquiring Brocade.

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