Price pressures, merger costs hit Alcatel-Lucent

PARIS (Reuters) - Telecoms equipment maker Alcatel-Lucent ALU.PA produced a bigger-than-expected quarterly loss on Tuesday as merger costs and pricing pressures took their toll, sending its shares down as much as 9 percent.

The group, created in December by the takeover of U.S.-based Lucent by Alcatel of France, has been struggling to win the confidence of customers spooked by uncertainty over product integration and future technology choices.

Problems surrounding the complex transantlantic merger emerged as early as January, when the group issued a profit warning, and resurfaced again in April with a sales warning.

"In the early days of our merger, we have had some attacks on our customer base," said Alcatel-Lucent Chief Executive Patricia Russo in a conference call.

"But we have not yet seen the all the benefits of the product rationalization work which affects the margins as well."

The results and lack of detailed outlook for the current year wiped 2 billion euros off the company's market value. The stock, down 8.65 percent at 8.76 euros at 1340 GMT, has underperformed the technology index .SX8P by more than 24 percent so far this year.

Alcatel-Lucent is the market leader for fixed-line network equipment and associated services, but lags Ericsson (ERICb.ST) in wireless gear.

Cut-throat competition from Ericsson as well as Nokia Siemens Networks NSN.UL, (NOK1V.HE) (SIEGn.DE) and Asian rivals has forced Alcatel-Lucent to sell wireless network products at relatively low prices, putting pressure on margins.

"It looks as if some of the savings that are made from cost-cutting are being absorbed by price pressures (particularly in the mobile equipment sector) which are worse than expected and hurting margins," said Richard Windsor, analyst at Nomura.

Alcatel-Lucent's wireless sales fell 11 percent in the second quarter while fixed-line revenues rose 3 percent.

Paris broker CM-CIC Securities said the group's second-quarter gross margin of 33.4 percent undershot its forecast of 38.2 percent and a market consensus of 36.9 percent.

The group's gross margin has deteriorated in past quarters from 34 percent in the first three months of the year and 38 percent in the second quarter last year.

"The unknown element on gross margins is what happens to prices in the industry," Russo said.

"We don't believe it (the gross margin) is indicative of the business going forward," she added.

WIDER LOSS

The group generated a second-quarter adjusted operating loss of 19 million euros, well below expectations of a profit of 67.8 million euros in a Reuters poll.

At the net level, it produced a loss of 336 million euros ($459.3 million) against a profit of 302 million euros the previous year and forecasts of a 147.1 million loss.

The result included an impairment charge of 298 million euros to reflect a drop in the market value of third generation high-speed mobile infrastructure operations of Alcatel and those of Canada's Nortel NT.TO, acquired last year.

However, the net result benefited from a 42 million euro gain from a litigation settlement and an after-tax gain of 80 million euros related to a change in pension liabilities.

"There is no clear path to profitability and no communication on margin targets which the market needs to value this company," said Thomas Langer, analyst at WestLB.

Alcatel-Lucent said it would not give detailed financial guidance before early 2008.

However, it confirmed it would generate 600 million euros in pre-tax savings this year thanks to the merger and had reduced headcount by 3,800 people in the year to date, or 30 percent of its three-year target of 12,500.

It said order flow was picking up and a strong ramp-up in sales in the second half would help it reach its full-year revenue growth target of about 5 percent at constant euro-dollar exchange rates.

On a sequential basis, second-quarter sales rose 13 percent at a constant euro-dollar exchange rate, beating the group's 10 percent sales growth target.

But year-on-year sales in the second quarter fell to 4.326 billion euros from 4.491 billion euros.