Galileo, Syracuse Affect Alcatel’s Financial Performance – Tchuruk Says Satellites, Ground Systems Still Key for Future Growth

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By finally signing a billion-dollar contract last month for further development of the Galileo satellite navigation system, the European Space Agency (ESA) might well have paved the way for the 30-satellite system to begin operations in late 2010, according to Alcatel, a major industrial player in the program and one that has felt the effects of recent delays.

The Nov. 3 statement on Galileo from Alcatel followed ESA’s decision Oct. 28 to sign a contract with Galileo Industries S.A. of Brussels for 950 million euros ($1.15 billion) to build Galileo’s ground network and the first four satellites. Alcatel Alenia Space, the French-Italian company formed in July, is a major shareholder in Galileo Industries.

The delay in the contract, whose approval had been held up for 10 months because of European government bickering over the location of Galileo control centers, was a factor in the poor financial performance of Alcatel Alenia as reported in Alcatel’s third-quarter financial statement.

Alcatel Chairman Serge Tchuruk said the satellite division is unlikely to reach Alcatel’s overall corporate goal of a 9-percent operating-profit margin even if the satellite sector rebounds as expected. Nonetheless, he said, Alcatel remains convinced that building satellites is of strategic interest for a telecommunications equipment supplier like Alcatel.

Not for the first time, Tchuruk felt obliged to explain why Alcatel maintains a satellite division.

In particular, Tchuruk said, providing television and other video programming to handsets and other mobile devices using a technical transmission standard known as DVB-H Plus is an emerging business that should benefit the satellite industry.

Linking satellites and a network of ground-based signal amplifiers to deliver programming to mobile devices is a growth area for Alcatel, Tchuruk said in an Oct. 27 conference call with financial analysts.

In addition, Tchuruk said, Alcatel’s partnership with Thales Group for the French Syracuse 3 military satellite communications system is a good business for Alcatel. He did not provide profit figures. The Syracuse 3 system will include two satellites and a network of fixed and mobile user terminals.

Alcatel and its Syracuse 3 partners were more than a year late in launching the first Syracuse 3 satellite and have paid financial penalties that reduced their revenue take on the program.

Alcatel does not break out its satellite division’s performance in its financial reporting. Alcatel Alenia Space, which is 67-percent owned by Alcatel and 33-percent owned by Finmeccanica of Italy, is embedded inside Alcatel’s Personal Communications business division.

Alcatel Alenia’s 2004 revenues were about 1.8 billion euros.

That division reported sales of 928 million euros for the three months ending Sept. 30. The operating profit margin of 6.9 percent was the lowest of Alcatel’s three main business units. Tchuruk blamed the space division for the poor performance and said the commercial market remains difficult.

The Alcatel Alenia merger became effective July 1 and resulted in a surprise capital gain for Alcatel, Alcatel Chief Financial Officer Jean-Pascal Beaufret said during the conference call.

As part of the merger, Finmeccanica paid Alcatel 110 million euros in cash. This payment, plus 19 million euros in other gross gains related to the sale, resulted in a net after-tax capital gain of 91 million euros — equivalent to 7 euro cents per share of Alcatel stock for the quarter.

Tchuruk said the Galileo delays and setbacks on other government space programs and a drop in commercial revenues are not trends that will turn around overnight.

“We see some recovery in the order book compared to last year, but it takes some time for orders to translate into revenues and we are still cautious about next year’s revenues,” Tchuruk said of the company’s satellite business.