Alcatel-Lucent cuts profit goal, raises doubts

Reuters

Alcatel-Lucent (Paris, France) scaled back its profitability goal for the year, raising new doubts about Chief Executive Ben Verwaayen's ability to turn around the long-struggling telecom equipment maker.

Alcatel-Lucent, like rivals Ericsson (Stockholm, Sweden) and Nokia Siemens Networks (Espoo, Finland), is suffering as telecom operators cut spending on their networks in reaction to macroeconomic uncertainty, especially in Europe.

The gathering clouds are particularly bad news for Verwaayen, who pledged to make Alcatel-Lucent a "normal company" again when he took the helm two years after a value-destroying merger rocked the company.

Analysts say that aim may now be further from reach after a disappointing third quarter that saw Alcatel-Lucent's cash burn accelerate to roughly $1.3 billion in the year to date. The group was also forced to abandon its goal of being cash flow positive this year, pushing it off to next year.

"In our view the company has distanced itself further from becoming a 'normal company'," says Thomas Langer, analyst at WestLB (Düsseldorf, Germany) in a note.

Alcatel-Lucent fell more than 14%, making it the biggest loser on France's blue-chip index and sending shares to lows not seen since early 2009. The company said it was now aiming for an adjusted operating margin of around 4% for the year, down from its prior goal of above 5%.

The more cautious tone comes after rivals Juniper Networks (Sunnyvale, Calif., U.S.A.), Ericsson and Nokia Siemens Networks also warned that the gloomier global economic outlook would likely lead telecom operators to cut their spending.

To cope, Alcatel's Verwaayen promised a renewed cost-cutting program aimed at generating extra savings in 2012 of $275 million in fixed costs and $412 million in variable costs.

"Given economic uncertainties, we will take more radical actions," says Verwaayen. "You will see us increase our efforts on cost control and cash flow."

Verwaayen also said it was too early to know how telecom operators would behave next year. Telecom network investments track with GDP growth because operators tend to claw back their spending when their customers become more price conscious.

"The market is uncertain, and it's not just because of the economic crisis," says Verwaayen about the outlook for 2012. "There are also unknowns about how Europe will regulate fiber broadband buildouts, and other regulatory uncertainties elsewhere."

The impact of the weakening economy has already begun to weigh on Alcatel-Lucent as third-quarter revenue slipped 6.8% to $5.2 billion compared with a year earlier, with double-digit declines in Asia and Europe.

The U.S., where Alcatel-Lucent's major customers AT&T (Dallas, Texas, U.S.A.) and Verizon (New York) have been spending heavily on mobile networks, held up better with a decline of only 0.3%.

"Beyond North America, Alcatel-Lucent struggles to find avenues for growth and is losing ground in Europe," says Bernstein (New York) analyst Pierre Ferragu in a note.

Much will depend on what happens in the United States, where Alcatel-Lucent generates one-third of its revenues. In the past few years, the company has surfed a wave of investments in U.S. mobile networks as operators try to keep up with consumers' appetite for smartphones and tablet computers.

The U.S. boom has also boosted Alcatel-Lucent's margins because the market is effectively closed to low-cost Chinese competitors like Huawei (Shenzhen, P.R.C.) and ZTE Corp (Shenzhen, P.R.C.) over concerns about the security of key national infrastructure.

Asked whether U.S. operators would also slow spending in the end of the year, Verwaayen demurred.

"We are strong in the U.S. and will remain so," he says.

Some analysts are already predicting that Verizon and AT&T will sharply slow spending in the fourth quarter, especially given uncertainty over whether AT&T's merger with smaller rival T-Mobile will be approved by antitrust authorities.

 (Editing by James Regan and Helen Massy-Beresford)

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