Embattled Alcatel-Lucent Hopes to be Ready for Rising Tide

When Ben Verwaayen took over as CEO of Alcatel-Lucent, he inherited a listing ship full of mismatched baggage and angry recriminations from his French and American senior officers, who formed the company and gave it its ungainly name in a disastrous merger of two equally beleaguered telecommunications-equipment vendors.

Nobody would mistake Alcatel-Lucent for the Love Boat. To this day, the word “troubled” often serves as a preceding adjective in describing the company.

To his credit, Verwaayen not only has, in his words, “played with the cards he was given,” but he’s been determined to look forward rather than backward, not seeking to condemn or to defend the corporate marriage of convenience and desperation that took two embattled, large companies and turned them into an incontinent, self-harming colossus.

Running Alcatel-Lucent is a dirty job, and, for now, Verwaayen has to do it. As he’s said previously, his goal is to get the company’s house in order, to avoid M&A hijinks, and to turn Alcatel-Lucent into a “normal company.”

In releasing its third-quarter results today, Alcatel-Lucent disclosed that it continues to cut costs, continues to inch toward improved operating margins, but that it also continues to struggle to generate top-line growth.

Losses reached €182 million ($269 million) in the third quarter. That was more than the €40 million it lost a year earlier and worse than analysts had forecast. Revenue fell 9.3 percent in the third quarter to €3.7 billion, also below market expectations.

In its legacy fixed-line telecommunications business and in its wireless-equipment group, Alcatel-Lucent is suffering from torpid market conditions and intensifying competition. The latter is particularly true in the higher-growth wireless side of the house, where Alcatel-Lucent faces its usual adversaries — Ericsson and Nokia Siemens Networks — as well as hard-charging Chinese players Huawei and ZTE.

The Chinese players are on the rise, with the European aristocracy back on its heels, looking for areas — such as Ericsson’s emphasis on services — where they can hold a long-term edge over the lower prices and improving quality of the Chinese vendors’ equipment.

Markets, and the buyers within them, are a problem for Alcatel-Lucent, too. Europe, traditionally its strongest market, remains in the dumps. Credit is brutally tight for operators in Eastern Europe and most of the developing world beyond China and India, making it tough for Alcatel-Lucent to identify and benefit from growth markets. In the US, where the company derives about a third of its business, it is competitive but doesn’t expect a major upturn until 2011.

It’s a tough world for Alcatel-Lucent, and its been that way for a while. The company hasn’t earned a quarterly net profit since 2006.

As for the remainder of this fiscal year, Verwaayen remains hopeful that the company can break even for the 12-month period. To reach the break-even point at adjusted operating level, according to the Financial TImes, the company will need to record operating profits of about €360m in the fourth quarter.

Given that a growth surge isn’t anticipated, Verwaayen and his executive team will have to fiercely slash costs to reach their year-end objective. The company reiterated its expectation that the market for telecommunications equipment will decline between eight to 12 percent on the year, and it doesn’t sound particularly sanguine about an immediate sales spike. Meanwhile, Alcatel-Lucent is about 80 percent through a cost-cutting regimen that targeted a €750-million reduction in annual expenditures. (Non-core asset sales also might occur soon.)

Verwaayen and his team don’t see a bonanza in 2010. Instead, they see growth of approximately five percent, not in the high single digits. They have more hope for 2011, and some of that hope — at least for network upgrades and a better overall economic climate globally — seems justified. Then again, even if the market rebounds by then, will Alcatel-Lucent be best positioned to benefit disproportionately or even commensurately with the rising tide?

It’s a question one needs to consider. Huawei and ZTE will only get stronger, and Ericsson isn’t going away. There are big questions surrounding Nokia Siemens Networks, not least of which is the parent companies’ desire to persist in the joint venture. Then again, it’s difficult to know now whether the restructuring or sale of that company ultimately will help or hurt Alcatel-Lucent.

The rising tide might be coming, but it remains to be seen whether Alcatel-Lucent will be sufficiently seaworthy to prosper from the next leg of the market’s journey.


One response to “Embattled Alcatel-Lucent Hopes to be Ready for Rising Tide

  1. Perhaps some of the recent news has demonstrated the transformation aimed at by ALU. A lot of good news has been made on the moves we’ve made such as yesterdays announcement of applications enablement for developers by opening up telecom assets. This is a trend we’re seeing from SPs and I thought you might want to talk with us to learn more.

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