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Alcatel-Lucent CEO Preps Kill List

Ray Le Maistre

It looks like make or break for Alcatel-Lucent in 2013. The company has started the year with a first-quarter net loss of €353 million (US$460 million) and a strategic review of its businesses and operating model, the results of which are set to be unveiled by new CEO Michel Combes in "early summer."

The vendor has already offloaded one small asset this week and a fresh review of the company's multiple operating units was inevitable. (See Euroblog: Combes Clearout? and AlcaLu Sells Off Its API Repository.)

Now the company's staff, customers, partners and rivals will be scouring the first-quarter results, looking for clues as to which of the vendor's operations might get harpooned with a "For Sale" or "Closure" sign.

The vendor has already put some units on the block, having created a "Focused Businesses" business group for the Enterprise, Submarine and the Strategic Industries units that collectively performed badly during the first quarter, with revenues down 22 percent year-on-year to €244 million ($318 million). (See Alcatel-Lucent Sharpens Its Focus.)

But it's the Networks & Platforms business group that will likely get the most attention from Combes, as it forms the rump of the company. In the first quarter it generated revenues of €2.7 billion ($3.52 billion), 84 percent of the company's total revenues of €3.23 billion ($4.2 billion). (In both cases, those figures were slightly better than a year ago.)

On the evidence of the first quarter, the optical equipment division within that group might have something to worry about: Its revenues fell by 15.6 percent compared with a year ago to €342 million ($446 million), while the rest of the Networks & Platforms divisions (including IP, wireless and fixed networks) all reported sales growth compared with a year ago.

To put the optical division's performance into even clearer perspective, one of its main rivals just reported a better than expected first quarter and a bullish outlook for the full year. (See Infinera Prepares for a Big 2013.) So what's the deal with the optical equipment business? Alcatel-Lucent says it's being dragged down by its legacy product lines. Here's the official explanation:

    Revenues for the Optics division were Euro 342 million, a decrease of 15.6% from the year-ago quarter. We continued to witness declines in our legacy equipment, which now represents 30% of our optics product revenues, partially offset by growth in WDM in both our Europe and APAC regions. Our 1830 Photonic Service Switch continues to grow as a percentage of optical revenues, reaching 36% in the first quarter, as sales grew at a high double-digit rate compared to the year-ago quarter. The relative share of 100G shipments has also continued to increase, from 12% in 2012 to 19% in the first quarter of 2013. Traction with our 400G Photonic Service Engine has also been confirmed, with the recent completion of successful 400G trials with Shaw Communications in Canada, France Telecom/Orange and Telefónica España.

The bottom line for Combes is that he needs to show the board, investors, customers and partners that he can revive Alcatel-Lucent's fortunes and instill confidence that the company has a long-term, profitable future.

To do that, the financials need to improve significantly. While first-quarter total revenues were up 0.6 percent to €3.23 billion, the gross margin slipped to 29.4 percent from 30.2 percent a year ago. While the operating loss, at €202 million ($263 million), was an improvement compared with 2012's first quarter, the net loss of €353 million was in stark contrast to last year's net profit.

In addition, the vendor ended the first quarter with a net debt of €358 million ($466 million), having burned €505 million ($657 million) of cash during the first three months of this year. That cash-burn figure includes restructuring, capital expenditure, tax and interest costs in addition to the quarter's operating losses.

Combes will know the company can't continue in this vein. In the meantime, he'll be aware that AlcaLu's share price has dipped 2.4 percent Friday morning on the Paris exchange to €1.06, giving the company a market value of less than €2.5 billion ($3.25 billion).

— Ray Le Maistre, Editor-in-Chief, Light Reading

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User Rank: Light Sabre
4/26/2013 | 6:31:43 PM
re: Alcatel-Lucent CEO Preps Kill List
I presume the LightRadio line is safe for now, right?
Ray Le Maistre
Ray Le Maistre,
User Rank: Light Sabre
4/26/2013 | 11:46:16 AM
re: Alcatel-Lucent CEO Preps Kill List
Surely he is going to make his mark and have a different view, coming from outside the company? I think we might be in for some minor shocks.
User Rank: Lightning
4/26/2013 | 10:46:31 AM
re: Alcatel-Lucent CEO Preps Kill List
... yes that would be the natural progression and end up with Fixed Broadband, Optics and IP. But then is that not pretty much what Alcatel had earlier.
In any which ways this is what logic suggests.. But then there could be some creative and radical thinking which Combes has up his sleeves.
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