Alcatel-Lucent: The Troubles Continue

The embattled telecom equipment company announces deep job cuts, affecting even management, to restore profitability. But pitfalls still abound

Does Alcatel-Lucent finally have a road map to recovery? Posting its third consecutive quarterly loss on Oct. 31, the battered telecom equipment company unveiled a management shakeup and additional job cuts that will lead to a 20% downsizing of its 80,000-strong workforce by 2009.

On Oct. 31, Alcatel-Lucent (ALU) reported a third-quarter loss of $372 million on revenues of $6.2 billion, down 8% year-on-year. That was worse even than the company's earlier warnings (BusinessWeek, 9/28/07). Alcatel-Lucent now predicts full-year sales will be flat, a downward revision from earlier forecasts.

Perhaps most worrisome, Chief Executive Patricia Russo acknowledged that the company's fixed-line phone and broadband business, traditionally its star performer, is starting to feel the pinch from a weak U.S. housing market, as fewer homes are being built. "We are seeing a slowdown in spending in the wireline part of the market, particularly around North America. Some of that is related to the housing issue," she said in a conference call with journalists.

Positive Market Reaction

To restore profitability, Russo is now seeking an additional $578 million in cost savings from job cuts. The company also will streamline the management teams overseeing its regional operations and will replace two veteran executives, Chief Financial Officer Jean-Pascal Beaufret and Christian Reinaudo, a top European boss.

Market reaction was generally positive, with shares up 1.6% in late-afternoon trading in Paris. "They have given a signal that they take change very seriously, that they're moving change all the way up to management," says Bettina Tratz Ryan, a Frankfurt research vice-president of the Gartner (IT) consultancy.

Weak in Next Gen Offerings

Yet the road ahead looks rough indeed. Besides the fixed-line slowdown in the U.S., Alcatel-Lucent is battling fierce competition in its wireless network business. True, competitors such as Ericsson (ERIC) are suffering as well (, 10/16/07), but Alcatel-Lucent's problems "are much more deep-rooted" than those of its rivals, says Per Lindberg, a London analyst with Dresdner Kleinwort (AZ).

In the U.S., Alcatel-Lucent's wireless business is centered on CDMA technology that is gradually being phased out in favor of next-generation offerings, a segment where the company is weaker. Elsewhere in the world, it has been losing market share to Ericsson and others who offer lower prices and often superior technology. Many analysts think Alcatel-Lucent will gradually have to exit the wireless business.

At the same time, the company is still in the thick of integrating after a transatlantic merger concluded in November, 2006. After initially saying the merger would lead to 9,000 job cuts, the company now plans a total 16,500 layoffs. Lindberg predicts that the tally eventually will reach 30,000. "They are heading in the right direction, but much more is needed," he says of the plan announced on Oct. 31, which Russo had presented the day before to Alcatel-Lucent's board of directors.

Potential Pitfalls Ahead

However the news isn't all grim. Fourth-quarter revenues are expected to improve both sequentially and year-over-year, although not enough to pull the 2007 total ahead of last year's $17.7 billion. Alcatel-Lucent is starting to stanch the red ink in its wireless business outside the U.S. At the same time, Ericsson and other competitors are likely to become less aggressive on pricing as they try to shore up sagging profits. "The environment is going to become a little bit more benign," says Richard Windsor, a London-based analyst with Nomura Securities.

But steering back to profitability won't be easy. Among the potential pitfalls: A chunk of the estimated $3.1 billion savings from layoffs might not reach the bottom line if the company has to offer deep discounts to customers to rebuild market share. Alcatel-Lucent and its investors could still be in for a very bumpy ride.

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