Alcatel-Lucent Posts Q4 Loss; CEO Forced Out Under Pressure
Alcatel-Lucent reported Q4 loss of 1.37 billion Euros, or 60 Euro cents a share, reflecting a 1.41 billion Euro asset impairment charge. Operating income was 66 million Euros. Revenues were up 13.8% sequentially to 4.1 bilion Euros, but down 1.3% from the year ago quarter.
While North American sales improved to 1.6 billion Euros from 1.41 billion a year ago, European revenue fell to 1.1 billion Euros from 1.28 billion, and Asia-Pacific fell to 714 million Euros from 775 million.
Ben Verwaayen, CEO Alcatel-Lucent, commented: “Our fourth quarter reflects the early progress of The
Performance Program announced last July. We announced clear choices on where we would operate, how we
would operate and where we would differentiate.”
“We have seen progress on all these choices, and close 2012 ahead on our cost reduction plans. We have
addressed half of the previously margin-diluting Managed Services contracts, and show continued and strong
growth in IP and Next Generation Wireless. We can see a clear statement of customer confidence through
growth in both our order book and backlog.”
The WSJ reports: Alcatel Chief Is Out as Turnaround Stalls
“The CEO’s departure comes at a turbulent time for the equipment maker. More than six years after France’s Alcatel merged with U.S.-based Lucent Technologies to create a telecom-equipment giant, the company is discovering that it can’t keep up in the global tech race. It is smaller by revenue than most of its competitors. But it competes in more lines of business than almost all of them. It has racked up billions of euros of red ink for its efforts.
Under Mr. Verwaayen’s leadership, Alcatel-Lucent has pinned hopes on leading the market for next-generation networks. But when France’s two largest cellphone operators launched the first next-generation wireless networks in the Paris area last week, they weren’t using Alcatel-Lucent’s gear.
Instead, they went with competitors who had figured out how to bundle the new network alongside existing ones all in the same small transmitter—something Alcatel-Lucent couldn’t easily match. The Paris-based company was outflanked in its back yard.
On Thursday, Alcatel-Lucent posted a €1.37 billion ($1.85 billion) loss in the fourth quarter, dragged down by an impairment charge largely on the declining value of its businesses making wireless network equipment and optical-network gear. It had full-year cash burn of €679 million—its seventh consecutive year of negative free cash flow.
The company has responded to its losses with a €2 billion loan package to buy time for a restructuring that aims to shed unprofitable products and exit underperforming contracts, especially in the troubled European market. The result is that a company with century-old roots in Europe will be doing less business there.
Alcatel-Lucent’s strategy for years has been to be an end-to-end supplier for the biggest telecommunications companies in the world. It supplies everything from the submarine cables that wire together continents to the software that phone companies use to calculate and send out phone bills every month. It can plan new wireless networks, make the equipment and then be the outsourcing company to maintain the whole thing.
But Alcatel-Lucent has struggled to turn a consistent profit across its businesses. Europe has been a particular problem. Amid a struggling economy, phone companies have been slow to upgrade networks. Alcatel-Lucent revenue in Western Europe was down 19% through the third quarter of 2012, according to company filings, and its wireless division, where the company has been losing bidding for European contracts, was off 23%.
Few companies—apart from China’s massive Huawei Technologies, which had nearly 50% more revenue than Alcatel-Lucent in 2011—compete on such a wide playing field. Sweden’s even-larger Ericsson focuses more on networks, services and software for mobile operators. When it comes to Internet routing and switching, Alcatel-Lucent competes instead against Cisco Systems Inc. CSCO -0.67%and Juniper Networks Inc. JNPR -0.71%In next-generation optical networks dubbed 100G, its rivals include companies like Huawei and Ciena Corp. CIEN +0.41%
That breadth has stretched a research budget that is already trailing bigger competitors. Ericsson spent 47% more on research in the first nine months of 2012 than Alcatel-Lucent. Huawei began outpacing Alcatel-Lucent in absolute research spending in 2011, even though Huawei’s China-based engineers cost much less.
Alcatel-Lucent officials say their situation means they simply have to be smarter than competitors about where they place their technology bets. “It’s not a matter of size,” Alcatel-Lucent’s Mr. Verwaayen said in an interview in November. “It’s a matter of choices that we make.”
Alcatel-Lucent is the offspring of two giants. France’s Alcatel descends from a French industrial behemoth that developed bullet trains. Lucent was the equipment arm for the original AT&T T -0.68%and includes Bell Labs, which helped invent the laser and the idea of a cellular network. In 1986, the two units were Nos. 1 and 2 in the global telecommunications-equipment market, accounting for a 49% combined market share.”
Eric Beaudet, an analyst at Natixis, a bank in Paris, said that Mr. Verwaayen had lost credibility among investors after promising a succession of restructuring plans that had failed to bring it to sustainable profit. In 2010, Alcatel-Lucent posted a net loss of €292 million. The next year, the company had a €1.1 billion net profit. For 2012, the company reported a full-year loss of €1.1 billion.
“With the C.E.O. having lost credibility, we believe that this move will be appreciated, even though a replacement has not yet been named,” Mr. Beaudet wrote in a note to investors. “We believe that the market should react positively to this announcement with Mr. Verwaayen having lost some of his credibility with the numerous successive restructuring plans.”
In a statement, Mr. Verwaayen said the company needed new leadership.
“Alcatel-Lucent has been an enormous part of my life,” Mr. Verwaayen said. “It was therefore a difficult decision to not seek a further term, but it was clear to me that now is an appropriate moment for the board to seek fresh leadership to take the company forward.”
Under his tenure, Alcatel-Lucent developed a unified set of network products, eliminating redundant French and American gear, and focused efforts around wireless broadband technologies as it fought larger rivals like Ericsson of Sweden and Huawei of China.
“Mr. Verwaayen had done as much as he could with the assets he had,” said Martin Nilsson, an analyst at Handelsbanken in Stockholm. “But when he came in, things were pretty bad there, and a lot of ground had been lost.”
Lucent, Mr. Nilsson said, had been reduced to making “legacy” wireline products for AT&T and other American operators, a once-lucrative business whose profitability had diminished following deregulation of the U.S. telecommunications industry in the 1980’s.
Alcatel had a similar symbiotic relationship with the French government, supplying most of the core equipment and land lines to France Télécom, or to public entities like Thales.
But Mr. Verwaayen’s austerity cure, which he successfully applied as chief executive of the former British telecom monopoly BT from 2001 to 2008, has not brought the same results at Alcatel-Lucent.
Mr. Camus, the Alcatel-Lucent chairman, credited Mr. Verwaayen for leading the company out of a difficult transition following its merger.