Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Alcatel (ALA)

Q3 2006 Earnings Call

October 24, 2006 10:00 am ET

Executives

Pascal Bantegnie - VP, IR

Serge Tchuruk, - Chairman and CEO

Mike Quigley - President and COO

Jean-Pascal Beaufret - Chief Financial Officer

Analysts

Tim Long - Bank of America

Remi Thomas – Cheuvreux

Robin Nazarzadeh - Citigroup

Tim Daubenspeck - Pacific Crest Securities

Sandeep Malhotra - Merrill Lynch

Alexandre Peterc – Exane

Richard Kramer - Arete Research

Eiji Aono - Credit Suisse

Paul Sagawa - Sanford Bernstein

Paras Bhargava – BMO

Presentation

Pascal Bantegnie - VP, IR

Thank you Operator. Hello, everyone. With me today on the call are Serge Tchuruk, Alcatel’s Chairman and CEO, Mike Quigley, President and COO and Jean-Pascal Beaufret, Chief Financial Officer. We will begin with an overview of Alcatel’s third quarter 2006 results, and then with an update of the industry trends, we will then open up the call for your questions.

If anyone has not yet seen a copy of the slide presentation and earnings release, it is available on our Website. Before we begin, I would like to remind you that certain statements we’ll be making today may be considered forward-looking. Please refer to the Safe Harbor statement contained in today’s releases. Now, at this point, I will turn the call over to Serge.

Serge Tchuruk, - Chairman and CEO

Thank you, Pascal. I am very pleased to welcome you to our Third Quarter 2006 Earnings Conference Call. Today should be the last earnings reported for Alcatel under the current structure, I will come back on the structure of the new company later on. So we will brief in that Mike will provide you with a brief of Alcatel operations over the period, then Jean-Pascal will discuss comprehensive disclosure of the financial improvements. I will then share some view of the industry while commenting on our pending transactions with Lucent and then Thales and Nortel. So Mike?

Mike Quigley - President and COO

Thanks Serge. I will start on page 2 with just few remarks on trends we are seeing in the industry and be now surprised to you, we talked about it before, we are seeing continued momentum in IP network transformation, really trying to push broadband services, and we are seeing that in fixed operators and enterprise they are already fairly well advanced in migrating their networks. We are seeing that in fixed operators from worldwide from access with IP DSLAM through to edge routing and through into the core of networks where we are seeing transmission capacity now being added lastly to cut with the uplift in video traffic.

Also seeing enterprises transforming their networks, we start first with the medium large enterprises, but now we are also seeing it in small medium businesses. Wireless operators still at an early stage of deploying core IP infrastructure and we expect that will develop over the next few years, as those operators move to IP based networks.

Now looking at the numbers on page 3, overall the revenues at €3.34 billion grew by 1.4% year-over-year or 3% at the constant rate, just a reminder that looking at first half for the rates where flat to higher we have now a 9 months gross rate of about 8%. The growth was driven mainly by fixed and private communications, we will look at each of those segments in just a little later.

Operating profit was at €258 million which is stable compared to the second quarter which was what we had indicated was likely to happen for this quarter. That leads to a net profit of a €155 million or €0 11 per share. €0.01 of that was from capital gains and if you compare that with Q3 ‘05 you may recall that we had in fact gain near to €0.07 due to the contribution from the (inaudible).

The net cash position is €722 million as you can see there, its down sequentially €206 million, but that is mainly due to the dividend payment of €219 million which took place after last AGM.

So turning now to page 4, and looking at the segment analysis, and I’ll come back to each of these in a little bit more detail. But first of all, fixed we had good growth, 6% year-over-year and in fact 14% for the first 9 months of the year. And if we exclude the seasonal submarine activity which was down a little bit, the growth in this quarter was in fact above 10%. The operating margin we had in fixed was also above 10%, and we had in fact a very good quarter in both terrestrial optics and IP in terms of operating profit.

We saw as we had forecast and softness in mobile communications, in fact we are down 9% year-over-year. Just to remind you, we are up 6% in second quarter and up 15% in first, but that down this quarter. What we’ve seen is in the emerging countries the number of 2G greenfield deployments is in fact diminishing. And as we also had mentioned in previous calls, we have been more selective about which of those opportunities we would go after, in terms of the commercial implications.

We also, it’s a fact of life -- we are also suffering a little bit from some uncertainty, our customers, while I have indicated some strong support for the moves that, the strategic moves that we are making without Lucent, and Nortel in UMTS business. It’s clear that they are awaiting to see those close and so the currently 3G active projects more likely to be materialized after the closure. So that has in fact impacted our quarter wireless revenues.

The profits on wireless came in about 6.4%, which was as we expected. And finally in private communications we had an 8% year-on-year growth, we had revenue growing in all segments, but enterprise and RoW communications were particularly strong and they also drove the profit in that business.

For now, let’s have a quick look at each segment, first of all fixed on page 5. As I mentioned, we are seeing continued effort in fixed in moving towards all IP infrastructures to support normally triple play services. And we had some new wins recorded during the quarter including win in Italy. DSO numbers were up, we had volume of 5.8 million lines in the quarter which is a growth of about 7% compared to last year. We also passed a bit of a landmark during the quarter with a 100 million lines now shipped since 1996 and also we are now above 100 customers for our high-end IP DSLAM. And we are seeing that move from ATM based DSLAMs to IP based DSLAMs accelerating. A significant win for us, during the quarter also was the win in GPON that we had with Verizon. We’ve been investing for quite sometime in GPON, we believed it was an important technology and it’s good to see we are now really starting to takeoff in that area.

IP service routing, the second area in fixed, once again the revenues almost doubled year-over-year. Just a reminder, it’s not only on IPTV, in fact 60% of the revenue we have in IP routing comes from residential or consumer based services, and 40% from enterprise. We have deals in IP routing across a broad range of applications, obviously triple play and IPTV, but also NGN voice, mobile and IP VPNs also. So we got in fact the full range of applications in our routing platforms.

While routing continues to grow strongly, we are starting just now to see a slow decline in MS WAN, although we’ve had quite some success in 3G RAN aggregation. So that is, in fact held our MS WAN business up quite well.

An interesting trend we are now seeing, in fact a very positive trend is in optics, there is a strong performance in terrestrial this quarter with more than 20% growth. And I guess, for the first time for many years we’ve seen our real revival in long haul networks and DWDM overall, so quite some time since we’ve seen it.

The submarine activity was down compared to the high we had in Q3 2005, it was down a bit in this quarter, but what is also very encouraging is we are seeing substantial pipeline growth in submarine, which is once again also a trend that’s very positive.

And the fourth area in fixed of NGN/IMS, we continue to gain momentum, we are now engaged in quite a number of commercial deployments and trials and in fact just about an old major cancellation in Europe such as BT 21C and Deutsche Telecom, China Netcom.

On to page 6 now, looking at mobile, it’s clear in the mobile space as we all know lot of consolidation taking place and number of the players aggressively positioning, as I mentioned we have been quite deliberatively selective in addressing some of those opportunities which has obviously impacted the revenue we are seeing in this quarter.

We saw impact in 2G a slight decline in our mobile radio business, but the Chinese market was in fact quite strong in the quarter, continued to be strong which is good to see. And the other factor in our 2G business is that we have now introduced a next generation, a new generation of BSC, its much cost reduced and it also has a twin TRX in the BVS which in fact allows double capacity in it and so we believe that allows to be a little more aggressive in 2G as we move forward.

In 3G as I mentioned while we had some recent 3G win in Asia and our trials are continuing in HSDPA with the plans for the commercial launch underway, its clear also there is some impact of all the moves that we are doing. In the NGN area we would be making very good solid progress in it, we’ve now have more than 60 million lines currently installed and commercial UMA launch happening in North America. So, while that’s very good to see, it’s also having the impact of course on traditional TDM industry switching which is in decline. And finally in Mobile space our video application continuing to gain momentum, we had some 80 customers have already chosen our platform.

Turning to page 7, as I mentioned the growth was quite strong, in private 8%, we saw particularly strong growth in applications with Genesys, that was both from our own organic efforts inside the company and also from two small acquisitions that we did with VoiceGenie and GMK. We seen IP telephony has benefited from the work we’ve been doing across the spectrum of customers, large, medium and small and what’s also been good to see is our customer satisfaction steps been very good in the enterprise area. RoW communications grew also as a result of some good execution of the contracts we had, such as the successful opening of a high speed line in Finland and the commissioning of an electronic interlocking system in Germany for the subway sector.

We also signed some new contracts during the quarter in China for both metro and a new high speed line. And also in space, the activity grew during quarter and we registered some three new major wins in Western Europe. So overall a reasonable performance in private.

Just turning now finally before I handover to Jean-Pascal to look at the geographic split. We were particularly pleased with the strong quarter that we had in Asia, where we registered in fact a 25% growth in U.S. dollar terms. And that was driven both by wireless and wireline in the Chinese market where the revenue was up 31%. So now you can see that Asia is in fact about 18% of the groups overall sales which is up some 3 points from Q3 ’05 that was 15%. And in North America we grew 16% year-on-year, and that is mainly from the wireline activities mostly in the RBOX.

So, North America is now 18% growth, we are now 16% of the total company revenue. And as we mentioned, we had, our impact of, our wireless business has had on the rest of the world, we are down about 2% in rest of the world and in Western Europe about 3%.

So with that, I’ll hand across to Jean-Pascal to cover the financials.

Jean-Pascal Beaufret - Chief Financial Officer

Thank you Mike. I am on page 10 and on the P&L first. We had in the September quarter sales of 3,335 billion up 1.4% but 2.7% at constant rate. We have recorded as well a gross margin of 33.6% which remained stable sequentially versus the June quarter reflecting both the competitive pressures already mentioned and our continued cost reduction projects.

We have capital cost or OpEx just 2.862 million, which was 0.2% of the 860 million of last year and slightly down sequentially down on the 874 million of the June quarter. Though the OpEx is now representing less than 26% of the total revenues, for more than 26% over the same period of last year.

The operating profit came in at 7.7% consequently. Just mentioned restructuring cost, we have reported a charge and expenses of 19 million over the quarter which bring the year-to-date amount to 60 million as we have explained in the prior quarters, its management for vacant real estate which we have stabilized that the load as to hide back some leisures in restructuring cost and to capital those cost as much less than 1% of sales as we had indicated in generally.

At the end of Q3 the sales stood at 270 million, with 184 million utilized so far. We had a capital gain in September quarter of 16 million which come from the disposal of or investments or assets in satellites, it remembers that in June 2005 we had a closer deal (inaudible) creating their number one satellite designer and manufacturer in Europe and this is the consequence of this deal, we had an adjustment of price which bode to a P&L of 16 million capital gain.

Slide 11, we see a net financial income or expenses of 64 million which is including recurrent charges such as recurring cost of debt 21 million, 5 million lower than last year same quarter. This quarter also includes an exceptional relativity impact of 15 million of interest related to late payment of (inaudible). That amount towards initially recorded as an income tax, when the tax issued was ongoing, correspondingly this rate classification of course to composite positive effect in the income tax line.

We have therefore taxes of only 13 million negative seemingly low just because of what I said, if we at least stay these taxes they are 28 million and 28 million is a bit more than the 10% of the net income before taxes. The earning per share came out at €0.11, €165 million, a €0.11 per share including €0.01 of capital gain which is just mentioned.

Coming now to the capital in the balance sheet, we see an operating working capital of which is remaining at 8.7% of the last 12 months sales which is 1%, 0.9% above the June -- the last June situation, but 1% lower that at September 30, 2005. This is inline with seasonal patterns, we are building inventories for the last quarter which is the biggest seasonally speaking in terms of top line. We are managing our receivables in reducing the DSOs which has come from one of it 8 days last year to one of the day this year.

Coming now to the cash flow statement or the cash frequency relation. We see three major points, first of all our free cash flow has experienced over the third quarter and improvement in excess of 200 million as compared to the similar quarter last year. This is fully inline with our targets of improved cash generation for the full-year 2006. A similar improvement has been reported indeed on a year-to-date basis, 500 million negative cash flow as compared to the 728 million September year-to-date ’05. You may remember that the last quarter is normally generating a big portion of the generation of cash in the full year. This year-to-date free cash flow improvement stand basically on two main sources, first of all improved earnings liquidity and the reduced outlets.

And we have as well improved our cash outflows coming from operating working capital. Last slide shows a very simplified balance sheet summary, this is a usual presentation of our balance sheet numbers which are fairly straight forward. Jut to preempt one of the question, the equity was quite stable coming from 6.4 billion at June 30 to 6.4 billion at September 30, 2006. Despite the distribution of a dividend of 220 million and due to the net profit of 160 million, the highest adjustment of, (inaudible) of some assets.

So I can turn it over to Mike now.

Serge Tchuruk, - Chairman and CEO

Okay, so I’ll say few words about the global positioning. I think Mike touched on while ago, saying that was driving the market and we’ll be driving more tomorrow is so called IP network transformation which is happening now to varying degrees more in mobiles but also they are having to happen in mobile. So I just want to mention that probably Alcatel is key technology partner in turn of 12 major Q1 project, we are 10 Alcatel actually. To give more in detail we have 80 references guaranteed for IP transformation Type 40 of customer deploying IPTV services like NT&T, Shanghai telecom, system in Russia, Telecom Italia. We have another 40 transforming as a network to full IP infrastructure to prepare for preferably later on like China Telecom, China Netcom, Telstra, [Wintel] Deutsche Telecom and the like. So why is it so? First of all because we have capability to integrate from n-to-n systems and provide for good level of safety for security focused in this and we have a very good based portfolio with access of all types not only of course fixed but also mobile in radio (inaudible) in mobile we have 2 and 2.5 G CDMA UMTS WiMax and the like.

We have a very strong position in Ethernet and IP based core and transport and I think we talked about the optics as a good example of it though we have the full range of services and we are very well prepared for good convergence between fixed and mobile and between network operations, network operators and enterprises, so I think those clearly is the key players of tomorrow, because it can set up of customers are the one which are investing today.

Looking at slide 14, well we on the, big strategic moves the main one being obviously the Lucent merger, so in terms of the integration talking about business model in one hand and organization issues on the other hand we are ready we already find the key jobs, we have good contribution on both sides and as soon as we authorize we can start without any delay. So that synergy have been evaluated initially at 1.4 billion we have proceeded with a bottom of evaluation and we are today very comfortable with these sort of target and hopefully we can meet with out any problem.

Product synergies, we think we know precisely what would be our road map in the sixth arena and obviously it should be more complicated with the 3G input in the mobile and which is currently under finalization.

Finally in terms of regulatory approvals every thing is obtained and we are now discussing the features and they are the process under review and we are quite sure or quite hopeful that this come to an end in due time. So overall we expect to close as expected before year end.

Now if we look at page 18, the key transactions as you know one is important that is acquisition of the Nortel UMTS radio access assets, discussions are coming to a conclusion. We are making joint presentation to a combined road map estimates with very good reception, following the Nortel transaction Alcatel serve an additional 14 UMTS customers around the world for combined footprint at about 1 in 4 UMTS operators.

So we are very hopeful that we should close before year-end or at year-end, and therefore we should be in position to materialize some of the discussion which are very active now with a number of carriers.

Thales partnership is also a very important move, the corporation agreements are being finalized, we are progressing satisfactory with the partners, Lucent people have to approve it. The government is also a partner in the discussion also to approve it and (inaudible) but they are very hopeful that we should close before year-end as we planned.

Now looking at what the titles we can disclose that information if you look at what Q4 ’06 should be – the quarter should include several things. First of all there should be reduced structure of Alcatel, after the transfer of assets to Thales, there should be the Lucent business integration and that part of the business which will happen between closing and year end, there should be the Nortel’s UMTS radio access business as of the date of acquisition and finally there should be restructuring provisions which can be moved before year end as well as the cash portion of the Thales transaction and capital gain associated with Thales transaction.

So we believe we are quite sure that Alcatel Lucent should be need definitive structure as of January 01, ’07. And as early as February ’07 we planned to first of all we brought on Q4 ’06 earnings as just I discussed, obviously they are complicated, but we do everything possible to clarify the various components through the market. And we should be able in February ’07 to disclose a full-year 2007 picture for the combine campaign, it will be to a certain extent pro forma, but we should have a pretty good handle of revenues and profit potential as well as the recessing time tables. So that’s where we stand today and putting myself already to answer any question you wish to raise.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Tim Long with Bank of America. Please go ahead.

Tim Long - Bank of America

Thank you. Want to just get a clarification on the – you talked about some 3G target being delayed, how many was that in the quarter and also could you just –many of those similar types of discussion on any other wireline businesses obviously some overlap with Lucent there as well, or is that something that or some recently just a little less overlap there? Thank you.

Mike Quigley

Tim, I think I had the front part of your question, probably you said the 3G delays that we’d mentioned, its really a question of customers deciding this point in time knowing what is going to be transpiring with the acquisition we are making of Nortel’s UMTS assets and subsequent merge probably putting off decisions until that picture is clear, which won’t be a very long mail, but nevertheless there is that tendency. The second part of your question was, had we seen a similar effect in wireline, really not so much in this quarter, it wouldn’t discount but there is a possibility in the next quarter but its probably fairly little clear there in terms of decisions that customers need to make.

Tim Long - Bank of America

Is there anyway you could just help us understand magnitude of the wireless impact?

Jean-Pascal Beaufret

It is difficult to tell, because today it’s very difficult for customer to elder something not even – who is going to be supplying, its very difficult to do anything up until we are merged and the merger is now due to happening in few weeks. So, obviously there is not long to be waited but I can tell you that the reaction of all customers which I have talked to have been very positive and in number of cases we already precisely know what sort of product offering, how we are going to sort orient the product offering given the customer request.

Tim Long - Bank of America

Okay, thank you.

Operator

And our next question is from the line of Remi Thomas with Cheuvreux. Please go ahead.

Remi Thomas – Cheuvreux

Thanks. Question on wireless infrastructure performance in the third quarter if I may? You were saying that you’ve been deliberately selective in terms of the contracts and hence we are roughly missing a €100 million in revenue fair enough, however I would have expected this selective approach to result in a improving sequential gross margin which I am not seeing or at least a stabilizing approaching margin for the wireless infrastructure which I am still not seeing, so one can help himself by asking the question are you guys still competitive in 2G. I mean we were expecting the 2G and the new ATCA based BSCs have an impact in Q3 we are not really seeing that we are expecting Erickson strategy to result in a deterioration of gross margin the worst the case but not that badly so are you guys its way behind the actually in terms of competitive traditioning in terms of your product range and sure we expected improvements going forward?

Serge Tchuruk

Couple of answers to your comment. First of all its true to say that the market is quiet competitive, you should look at the gross margin is a nice player you will have an idea of the pricing competition. Secondly second answer is that given the prospective of the triangular merger of Lucent-Alcatel and Nortel in respect to 3G there are things which rather in terms of R&D would not necessarily have done -- state alone in other words we are sort of pressing on the NGN of the WiMax in a number of other things, not really reducing any of their research which rather in 3G in the perspective of economies of Gayle which rather to achieve when we are merged. You know overall our market share in cellular if you are a, the three inputs and you take a all standard approach going to be 18% worldwide. Which is by…

Remi Thomas – Cheuvreux

If I can just add a quick follow-up would you expect the new BSC and the new 20 twin TRX to have a positive impact on margins in Q4 will that be too early?

Serge Tchuruk

I think, Remi that would be a little too early.

Remi Thomas – Cheuvreux

Thank you.

Operator

And our next question is from the line of robin Robin Nazarzadeh with Citigroup. Please go ahead.

Robin Nazarzadeh - Citigroup

Yeah, thanks very much a couple of questions for me first on fixed, wondering if you can give us some more detail on the product mix whether legacy revenues were better than expected or not and if that had a positive impact on margin or in fact what we are seeing is items like IP routing and optical really ramping on the margin side, second question is on DSO, it looks like the net adds were a little bit light relative to what we have seen in the first part of the year, wondering if you can talk about what you are seeing in inventories over there and whether you are actually seeing your customers delay purchasing until the merger is gone through? And third, just a very simple question, have we reached the bottom in mobile margins? Thanks, very much.

Serge Tchuruk

On the drivers for our bottom line, If I had to go to, I would go to IP and optics and in no way the legacy products, except to may be ATM, also the ATM is stopped to shrink right now, but to a lot extent its healthy in terms of profit contribution in the new technologies or pulling the whole thing actually.

Mike Quigley

The product mix question as Serge addressed absolutely clearly its not dominated by any upswing we’ve seen in legacy or even any reduction of the rate of decline, its declining at the rate we had expected it to. So, as Serge said it’s in fixed optics and IP, its going quite well. Your question Robin on DSL net adds, I think what we have seen over many years now with DSL markets is we see cycles, it take some trials over quarter, now the first half versus second half and I think that’s what we are saying, a strong first half with a second half probably watching out of inventory that is taking place, and we just – we are going to probably continue to say that as we see more and more video sell deployments takes place, that probably bit of over billed and then will back half a little. So it’s just, I think it just the normal cycles. And on the last question you had on the mobile margins, and Jean-Pascal may want to comment as well, I think just like to reiterate again the effect that we expect on 2G of the new range of products, cost efficient products that had. Jean-Pascal you want to?

Jean-Pascal Beaufret

I may just add a comment, that would be the same comment as Mike, mobile business as well the marking are going out, we should keep in mind that mobile is not simple business, it’s a business including a lot of disconnectivities and some of its activities margin going out.

Robin Nazarzadeh - Citigroup

On a net basis, though you should expect that this is sort of the bottom for the business?

Jean-Pascal Beaufret

Not seem so.

Serge Tchuruk

One another thing I may add, something which I think good, right with some of the networks, we have suffered a lot from quite a few years in some regions, but we see today some very encouraging, we are back in the black by the way and well in the black, some encouraging signs -- market is speeding up and our market share is anywhere between 40 to 50% of world market obviously, when this happens? And I think it’s likely to happen probably as early as next year, we should have a good leverage.

Robin Nazarzadeh - Citigroup

Okay, thanks very much.

Operator

And our next question is from the line of Tim Daubenspeck with Pacific Crest Securities. Please go ahead.

Tim Daubenspeck - Pacific Crest Securities

Thank you. Two questions, the first one, in terms of kind of the Q4 outlook on the North American side, are you expecting any type of negative impact from the Bellsouth AT&T merger and indications of a slowdown in spending by those customers in Q4. And then the second part, some nice surprise in terms of positive performance in China, some of your Chinese competitors were seen order cancellations from some of their component suppliers, what’s driving the solid performance in China here in Q3? Thank you.

Mike Quigley

I’ll take the U.S. question Tim. We were obviously not guiding for Q4, but just Jean comment on the market, the acquisition of Bellsouth by AT&T, we don’t expect that to have any negative impact on us, so Tim in fact just – we are hoping in fact for the contract in a long term, now what impact that will have on Q4 is yet to be same, but overall I think its we see it is a positive move.

Serge Tchuruk

On China actually the interesting thing that we are clearly gaining market share in China against among others who are weak. Where are we gaining market share? First of all we take better advantage than they do on the mobile, on 2G and 2.5G today on 3G as been deferred. So 2G is putting the market and obviously we seem to be increasing our market share to the expense of some other players. We are also recovering quite well in optics, where [Wowe] had made a little headways and we are gradually recovering in optics. We are also getting into the picture for NGN in fixed networks which comment to others. So overall I think in many fronts we seem to be doing better than the average of our competition.

Tim Daubenspeck - Pacific Crest Securities

Thank you.

Operator

And our next question is from the line of Sandeep Malhotra with Merrill Lynch. Please go ahead.

Sandeep Malhotra - Merrill Lynch

Thank you. I have two questions, first for Mike, could you please give us some detail on the Vodafone frame agreement and what implications do you think that might have, including your Nortel UMTS assets on the competitive dynamic in Europe and secondly question for Serge, its seems that Lucent is winning IP transformation contacts in Europe and Alcatel is getting stronger in the U.S. Could you provide us some color on what we should expect post merger from what seems like pretty strong geographic complementality here? Thank you.

Mike Quigley

Sandeep I am not sure I can say too much on the Vodafone agreement, to be honest I am not clear what we can and cant publicize, it that at this point but what I will say is if whatever we can provide would do so after the call. I just I am frankly not sure what I understand at this point or not.

Sandeep Malhotra - Merrill Lynch

Do you expect competition in Western Europe essentially to get worse as a result of your entry into Vodafone?

Mike Quigley

No I wouldn’t say the competition will necessary get worse I mean we are in a very competitive environment today, the consolidation is taking place we hope we will may be – that to some extent but we will see.

Serge Tchuruk

Can I make a quantitative comment on these sort of issues. We are seeing -- rightly so as a strongest player in sixth IP transformation of fixed networks. We were seen not as strong as some other on the mobile. Today the fact that we are coming up in the mobile with these triangular merger gives – look more sort of security on our customers and they here are the very key player on the convergence gain. So, in that if I had to qualify what if is happening in Europe that precisely what I described. Now, yeah Lucent got an NGN interesting contract with KPN but which does include Alcatel, and to my knowledge some IP routing does it Mike, yes so I mean it’s we are competing against Lucent and hopefully when we can merge, its going to be a sensitive approach but for time being they seem to beaten up so bad in Europe. So and I am glad to see that they are succeeding this is first time I see, I am happy to see a competitor doing well actually.

Sandeep Malhotra - Merrill Lynch

Thank you.

Operator

And our next question is from the line of Alexandre Peterc with Exane. Please go ahead. Mr. Peterc your line is open please go ahead.

Alexandre Peterc – Exane

My question was the seasonality going in to Q4 now you don’t provide any guidance at this stage, but can you tell us what it looks like? And also for the mobile side, what is the order level looks like going into Q4 after having Q3, will it have a slightly more favorable Q4 going forward, and some of your competitors also have a seasonally weak Q3? Thanks.

Jean-Pascal Beaufret

As you know we are not guiding on Q4, but just to be more specific, you know that the Q4 quarter is always the most – the strongest one in the year and especially for medium term project or long term project. So this would be reflected in a much stronger Q4, is what we can say so far, seasonally strong.

Alexandre Peterc – Exane

And in terms of operator, you’ve had a budget flush in fact, could you see any of that this year as well?

Serge Tchuruk

We don’t see any special eternity in any budget flush or – increment of revenue this quarter, we see a strong Q4 as you will.

Jean-Pascal Beaufret

I don’t think we are seeing any particular trends in budget flush.

Alexandre Peterc – Exane

Okay, thank you.

Operator

And our next question is from the line of Richard Kramer with Arete Research. Please go ahead.

Richard Kramer - Arete Research

Thanks very much, a couple of questions for Jean Pascal and then some for Mike and Serge. Jean Pascal that was mentioned in the statements specific P&L impact on the Alcatel organization of the strategic moves had added from additional cost, can you give us a rough sense of quantification of those cost that came in this quarter and a related question, can you tell us roughly what the margins or the business would look like excluding the space in transport business which is leaving the P&L to go to Thales, would this above or below group margins and by how much?

And then a couple of questions for Mike and perhaps for Serge. We seen a a lot of discussion in AT&T as we see around the Microsoft Middleware solution, can you confirm whether Alcatel will continue to support an alternative solution to Microsoft or it simply to work with Microsoft as an integrator?

And then on the enterprise business, I know you are doing a lot in consolidation right now but there is clearly some consolidation moves in that space, is that any chance or interest or need to participate in consolidation of the enterprise business where at least the Alcatel business is a very regional business and some of your large competitors are showing very good growth. Thanks.

Jean-Pascal Beaufret

I am going to try to answer your first question, where the incremental cost coming from the or given transaction, I took first that we should look at this cause both at Lucent and Alcatel side because we first as an example have had a so to speaking and also to speaking been quiet substantial just to set up a big meetings in to highlight with what a transaction has been significant as it cost, then I would say that those cost or would have probably have let us have lower OpEx in this quarter if we had not pursued the transaction. So you don’t see it because the kind of cost today is quiet well controlled but we would have probably have had lower cost. The second question is about the margin gross margin and operational margin if we were to discontinue the Thales businesses, contributed to Thales, the answer is clearly yes the margin would be better with (inaudible) we will then state with the discontinuation of Thales segment we would restate to sound sixth year and you would see that the order of magnitude of improvement of margin would be a half 3.5% of sale, of return of sale. At the operational level as well as at the gross margin level.

Mike Quigley - President and COO

Okay Richard, I will take the first question on the question on IPTV and Microsoft. Just make sure we have been working with Microsoft now for quite some time on in number of accounts, just to mention through DT and AT&T in fact we play quite a significant role in setting up a triple play infrastructure for speed and we have been working closely with Microsoft as we had with AT&T and we are, I mean this was we are setting out on quite an adventure when we are rolling out this big IPTV networks which we know was that quiet complex huge undertaking for our customers and the two companies Alcatel and Microsoft have been working quite closely together day-by-day exchanging information between our broad space to get the solution out for our customers which is going quite well and I think in the recent call from AT&T you would have seen what they have said about what’s happening by the end of the year. Now why we are doing that Microsoft understood that we were continuing to support customers on the platform the middleware platform that we had which is the O&P and we were quiet a front about that. So it’s another straight forward simple black or white answer that I can give you, the fact is we are not going to let customers down we are going to continue to support what they want to do and that’s the philosophy we will take as we also move forward.

Serge Tchuruk

The enterprise part of your question Richard and I think you gave me an opportunity to clarify what we think we will do in enterprise. But to know we were sort of handicapped because our presence in U.S. were quiet limited to penetrate US was, has been is the high cost proposition for us. And overall our market share in enterprise is very less than what would be logical with a quality of our product which is we don’t call by many industry analysts and the like. So we clearly want to have much more dynamic strategy ones the merger is achieved obviously Lucent has no enterprise product but they have some good connection with lot of enterprises doing some merit services for some of them. I believe the synergy is going to be very strong given the portfolio of Alcatel so in the Nortel enterprise is now key area for grouping Alcatel and I believe we should probably see not to driver of our growth in the next three years. By the way we had a big advance in Genesys, Genesys was plus 30% again this year and it’s very well suited to the computer telephone integration which we are getting lot of momentum.

Operator

And our next question is from the line of Eiji Aono with Credit Suisse. Please go ahead.

Eiji Aono - Credit Suisse

Hi its Eiji here. Just a question back on the 3G side and on mobile on the 3G side you mention that they were delays as customers were kind of looking at the merger with Nortel and then Lucent. You seem to be implying that these are just delays and that they will come in at some point, is it not a chance that the customers once they see the fully integrated 3G business at this maybe they want to go else were in terms of their 3G product or may be even just feel so confident that you will actually get those contracts. And then in the rest of mobile you were mentioning that on 2G side you are being little more selective on analog infield that will also starting to slow down if we take those two together should we actually expect that the Alcatel mobile business does continue slowing down for the next couple of quarters before there is any recovery? Can you please comment on those? Thanks.

Mike Quigley

Eiji, as I said on the delays, customers can always make decisions we are pretty confident that the portfolio that we will have on the merger will execute will be fairly attractive but customers are free of course to make the decisions in the time they wish to make them. On the 2G its absolutely true we have been little more selective particularly in Latin America and middle east, but I think it would be inappropriate for me to comment on what we will see in the next quarters. I think that will simply just play it self out, as it goes with – lot of unknowns in here, what crossing competition do, what the amounts going to be. So I think we just need to wait and see.

Serge Tchuruk

One additional comment on the 2G situation in some of the developing country, I mean we see a strong Greenfield project, we have the share of serious work giving trenches and the like is getting bigger and bigger, makes bitten under, the value adding it getting shrinking. So, that typically the sort of thing on which we already got [audio disturbance]

Eiji Aono - Credit Suisse

Okay, thank you.

Operator

And our next question is from the line of Paul Sagawa with Sanford Bernstein. Please go ahead.

Paul Sagawa - Sanford Bernstein

Okay, so just a lot of consolidation going on in the industry, there also our probably customers out there who find themselves now in a particular category another with a single vendor, for example Deutsche Telecom and Optical with yourselves and Lucent. I am sure there is customers in that situation, now does this create any specific trouble for you in managing the transition and on the foot side– it also create opportunities to become another vendor to carry and make find themselves now wishing for a little bit more diversity in their vendor base. Can you sort of talk about the puts and takes of the industry structure, how it impacts those kinds of dynamics.

Serge Tchuruk

We think there is much more to be gained from cross selling of product between the two mother companies Alcatel and Lucent than there is to be lost through cannibalization. Give you an example what we see can do in cross selling and today Lucent doesn’t have an IP based technology, we do, they market juniper products, hopefully they should when time comes, their team should market our products, that’s one example. In radio systems we make a lot of like antennas, amplifier and the like and they don’t do, and these are two examples, there are some examples where one could perhaps get the common company would do some, but in our view we have looked at Ethernet value and what we communicate to the market place, but there is much more to regain from the synergies and lost from the cannibalization.

Eiji Aono - Credit Suisse

Thank you.

Jean-Pascal Beaufret

Operator we will take one last question please.

Operator

Thank you sir and our last question is from the line of Paras Bhargava with BMO please go ahead.

Paras Bhargava – BMO

Thanks a lot. Question just probably a little more on your view on the mobile market totally going into next year if we split it in to broadly in the 3 terms 2G GSM 2G CDMA which should be the Lucent piece and then the 3G business what’s your view next, going in to next year what should that do broadly speaking to your Alcatel standalone. Maybe if you could only think about that my revenues and margins if your share remains the same would you expected to be up slightly or down slightly just directionally and then finally jump up, can you just studied higher when account for the pension situation at Lucent this morning Lucent told us and I am sure you know this in much more detail than we do that the pension credit if there is a decline by $200 million next year how will you account for that in IFRS for us and perhaps you could give us some color on that that would help.

Mike Quigley

Okay let me first just answer try and answer your question on the mobile market --- I mean clearly to, the total market itself you look at all the technologies together was growing fairly robustly in 2005 it cut down somewhere in 2006 and we see roughly some growth rates in 2007 as 2006 in terms of the splits clearly UMTS broadband CDMA is growing quite rapidly GSM or 2, 2.5G technology is flattening off and CDMA I think you probably heard might heard this morning already today from colleagues in Lucent they still say that as a solid business its not going away anytime soon its clearly doesn’t have huge growth rates but its staying in there. So, the situation on mobile whole mobile picture is quite interesting if the different technologies and we are also not forgetting the importance of WiMax which we have been investing a lot in over the last couple of years and that is an OFTM based technology which will also be important for 3G. So we have got the range of technologies some flattening others climbing and I think the combination as Serge said of ourselves, Nortel, Lucent base and technology skill will place us very well.

Paras Bhargava – BMO

Could you give us color on what kind of what should that mix change next year something Alcatel standalone basis mike due your revenue growth I mean you are saying same as this year and your margin should stick around this quarter – this level?

Mike Quigley

I really don’t think it make much sense first to talk about standalone next year, I mean it’s frankly it’s a hypothetical situation. So it just wouldn’t make sense to do that.

Jean-Pascal Beaufret

Happy to answer your question. The pension credit of Lucent, the pension, assets and liabilities of Lucent would be accounted with three features we have to keep in mind first, pension credit would be on operating income line and now on the operational line, this is point one. Second, this would be based on the same assumption then that which are selected or calculated in Lucent today. The assumption we should all to calculate with pension credit are based on the nature of assets and liabilities, so the discount rate do have change and the expected rate for example depend mostly upon the allocation of assets. And then point three, there would be – we would be apply a purchase accounting in this pension assents and liabilities, we should completely erase the unrealized capital gains and losses and would consequently probably have raised as well some amortization of unrealized capital losses. I take advantage of your question to spotlight once again the recent announcement by Lucent one hour ago after excluding the earnings. There is a significant improvement in all assets and liabilities on pension because in aggregate we should take all assets they are matching all liabilities today after an improvement of more than $2 billion. Thank you for having raised this question.

Paras Bhargava – BMO

You are welcome, Jean Pascal. Thanks for your interest.

Pascal Bantegnie - VP, IR

I think we have come to the end of our call. So thank you for your question, and any more question can be directed to the IR department. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Alcatel Q3 2006 Earnings Call Transcript
This Transcript
All Transcripts