By Sam Schechner
PARIS--Telecommunications equipment maker Alcatel-Lucent (ALU)
plans to slash 5,000 jobs and reorganize its business more narrowly
around profitable areas and clients after it swung to a net loss of
EUR254 million and burned through half a billion euros in cash in
the second quarter.
A sluggish global economy and cutthroat competition have weighed
heavily on the Franco-American company. European and Chinese
clients are slowing network upgrades. Razor-thin margins for the
initial rollout of new high-speed wireless networks in the U.S.
have also hurt, replacing more profitable older technologies that
had been the company's cash cow.
Alcatel-Lucent's new cost-cutting plan accelerates a cultural
shift in a company that built up a reputation by being a one-stop
shop, but has been overtaken by larger and cheaper rivals. The
company plans to abandon or renegotiate as many as a quarter of its
service contracts with clients and exit or restructure operations
some smaller markets where it is not profitable.
In total, Alcatel-Lucent aims to pare an additional EUR750
million, on top of an existing cost-cutting plan, for a total of
EUR1.25 billion in savings by the end of 2013.
"We can't be everything for everybody anymore," Chief Executive
Ben Verwaayen said in an interview, indicating that the company
might further pare down its array of products as it reorganizes to
absorb the job cuts.
"If you were an ice cream shop, you probably wouldn't have five
types of vanilla," he said. "Maybe three types of vanilla is
enough."
Alcatel shares slumped to new lows Thursday before recovering
modestly, as investors digested the downbeat report and the
company's restructuring plans. Last week, after warning it would no
longer hit its goal of improving its operating margin from last
year's 3.9% level, Alcatel shared tumbled to what until Thursday
had been their lowest levels in more than two decades.
The company's current guidance is only that the second half of
2012 will show better margins than the first half. Mr. Verwaayen
declined to say whether Alcatel would show a profit for the
year.
"They are too small in everything they do. That's why they
struggle to make money," said Pierre Ferragu, an analyst at Sanford
C. Bernstein & Co. "The company as it stands is
unsustainable."
Alcatel-Lucent, which was formed in 2006 by the combination of
Paris-based Alcatel and former N.J.-based Lucent Technologies Inc.,
has seen its woes compounded by a broader telecom slowdown.
France Telecom SA (FTE.FR) on Thursday reported an 11% decline
in first-half profit compared with a year earlier, amid a price war
in the French mobile-phone market, although the company reiterated
its full-year guidance and even announced an interim dividend. On
Wednesday, Spain's Telefonica SA (TEF) said it would cancel the
payment of all remaining dividends and share buybacks for this
year, and released its results--including a 14% decline in
second-quarter profit--a day earlier than expected.
Lower profit from phone-service providers is trickling back to
equipment makers. Earlier this week, Chinese competitor Huawei
Technologies Co. reported a 22% decline in its first-half operating
profit. Last week, Sweden's Ericsson (ERIC) posted a 64% drop in
its second-quarter earnings, with all companies suffering from
competition and slower investment from operators.
But Alcatel faces particular problems. The company posted a net
loss of EUR0.11 per share, compared with a year-earlier profit of
EUR43 million, or EUR0.02 per share. Adjusted operating profit, a
closely-watched figure for the company, swung to a loss of EUR31
million, compared with EUR87 million a year earlier.
Of particular worry has been the company's cash burn. Alcatel
said it had a free cash outflow of EUR511 million in the quarter,
compared with a reduction of EUR355 a year earlier. Some analysts
suggest the company could face liquidity issues in coming
years.
Mr. Verwaayen said that although the cash flow was a "bad
number," the company had adequate cash reserves. Instead, he said,
his concern is less with this quarter than with overall
strategy.
"We have to react much more decisively and much faster and much
more globally than we have ever done before," Mr. Verwaayen said.
"We need to make a change in order to become a sustainably
profitable company."
Write to Sam Schechner at Sam.Schechner@wsj.com
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