Alcatel-Lucent SA (ALU) Chief Executive Officer Ben Verwaayen will need to eliminate an additional 10,000 positions to catch up with more efficient rivals as the unprofitable phone-equipment maker’s cash pile dwindles.
Even taking into account the 5,500 job cuts announced in October, Alcatel-Lucent’s revenue per employee was 49,700 euros ($63,600) last quarter, at least 14 percent less than those of Nokia Siemens Networks and Ericsson AB, data compiled by Bloomberg showed. Selling and administrative expenses as a percentage of sales, at 16 percent and compared with 11 percent for Ericsson and Nokia Siemens’s 10.5 percent, must be lowered for the French company to survive, said Alexander Peterc, an analyst at Exane BNP Paribas in London.
“They are trying to reduce the cost base substantially with their latest restructuring effort, but this may be too little, too late,” said Peterc, whose 50-cent price estimate for the stock is 37 percent less than yesterday’s close in Paris. “Gross margins are just too low to support this.”
Into his fifth year as CEO, Verwaayen is considering asset sales to raise cash after losses and shrinking revenue have strained Alcatel-Lucent’s finances. The Paris-based company has consumed 700 million euros of cash on average annually since its merger with Lucent Technologies in 2006, prompting concerns about its ability to repay debt, some of which will be due starting next year.
The shares added less than 1 percent to 79 cents at 9:24 a.m. Paris time. They have plummeted about 80 percent since Verwaayen took over in September 2008. The 60-year-old hasn’t reached his goal of making Alcatel-Lucent sustainably profitable, and last week reported a third-quarter loss of 146 million euros. Former chiefs Patricia Russo and Serge Tchuruk were driven out by a series of profit warnings that wiped out half of the company’s market value in the year after the 2006 merger.
Intensifying competition from China’s Huawei Technologies Co. and ZTE Corp. (000063), as well as declining sales of phone equipment in Europe have prompted some competitors to be more aggressive in scaling back their workforces.
Nokia Siemens, the venture between Finland’s Nokia Oyj (NOK1V) and Siemens AG (SIE) of Germany, announced plans a year ago to slash 17,000 positions, or 23 percent of its headcount. The cuts helped the equipment supplier report a third-quarter operating profit of 182 million euros and an adjusted operating margin of 9.2 percent. Profitability may climb to as much as 12 percent in the current period, Nokia said on Oct. 18.
Nokia Siemens, with 60,600 employees at the end of the third quarter, generated 57,770 euros in sales per worker in the period. The figure for Ericsson, the largest wireless-equipment maker with a workforce of 109,000, was 58,280 euros, according to its quarterly report.
To reach similar levels of productivity, Alcatel-Lucent, which will have 72,500 workers after completing the 5,500 job cuts announced last month, will have to lower its headcount to no more than 62,500.
“We are confident that we have laid the right plans to achieve the aims set in our performance program,” said Simon Poulter, a Paris-based spokesman for Alcatel-Lucent. “We are driving that program aggressively.”
Verwaayen so far has held back from more drastic job cuts. The former BT Group Plc (BT/A) CEO said in January that it was “out of question” to reduce the company’s workforce by 25 percent -- a proportion similar to Nokia Siemens’s.
“Rather than trying to do something to please for five minutes, we want to do what’s right for the company,” Verwaayen told analysts last week. “We have to look at the reality of the market from a cost point of view, not assuming that Europe will come back next year.”
Verwaayen is balancing political backlash from President Francois Hollande, who pledged to block a parade of firings, with declining network investments from operators, especially in Europe. Chairman Philippe Camus was called in by government officials for a meeting in mid-2012 to discuss the manufacturer’s plans to eliminate positions.
Top union representatives of the French telecommunications companies have called for an industry-wide rally on Nov. 13 to oppose to job cuts. Labor officials at Alcatel-Lucent have also said they’ve called on ministry officials to step in.
“Alcatel-Lucent, unlike Ericsson or even NSN, is much less concentrated in a single area and because of the widespread nature of their operations, they will struggle to get anywhere near the kind of efficiency ratios you get with other players in the sector,” Exane’s Peterc said. “Targeting that type of ratio would mean Alcatel-Lucent downsizing quite substantially.”
At a company with 26,000 employees in research and development alone, Verwaayen is maintaining an R&D budget that amounted to 2.5 billion euros last year. He has revamped Alcatel’s research units to get new products to market faster, and has allowed carriers to participate in the development process.
Alcatel-Lucent’s miniature antenna, a 5-centimeter (2-inch) tall cube dubbed LightRadio released last year, is Verwaayen’s bet to grab contracts in the wireless market, where Ericsson said it had a 38 percent market share at the end of last year. Alcatel-Lucent has been working to improve the antenna with customers including Verizon Communications Inc. (VZ), France Telecom SA (FTE), Telefonica SA (TEF) and China Mobile Ltd. (941)
“Alcatel’s not a motionless company -- they scored points on innovation in fiber, LTE, routers,” said Roland Montagne, a Montpellier, France-based analyst at researcher Idate Digiworld Institute, referring to the long-term evolution wireless technology that powers high-speed networks. “The problem is their business still depends too much on Europe and their product portfolio is too large, while NSN for example has become a pure player.”
Ericsson today projected the market for network equipment will expand 3 percent to 5 percent annually through 2015, with growth in services and support solutions exceeding that.
While Alcatel-Lucent has said it will keep both its fixed and mobile businesses, the company is weighing whether to sell some assets to generate cash. Its enterprise, strategic industries and submarine businesses have been cited by analysts as targets.
Standard and Poor’s said Aug. 18 it may reduce the company’s debt ratings further into junk, citing potentially worsening liquidity amid waning cash. Alcatel-Lucent’s debt is also rated junk by Moody’s Investors Service.
Alcatel-Lucent targets a positive net cash position at year-end, after slumping to a net debt of 84 million euros at the end of September, meaning it had more debt than cash.
The company will have to repay 837 million euros in 2013, 462 million euros the following year, and 1 billion euros in 2015, according to data compiled by Bloomberg. Its net loss will reach 306 million euros this year, followed by a deficit of 304 million euros in 2013, the average of analyst estimates showed.
“The company is now entering the worst case trajectory, combining loss of market traction, structural gross margin decline and a lack of meaningful restructuring initiative,” Pierre Ferragu, an analyst at Sanford C. Bernstein in London, wrote in a note yesterday. He expects Alcatel’s business to deteriorate and the company to consume about 1 billion euros in cash annually over the next few years.