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Margin Misery for Alcatel-Lucent

Ray Le Maistre

Alcatel-Lucent (NYSE: ALU) saw its gross margin dip to 27.9 percent in the third quarter as it embarked on its latest efforts to cut costs and achieve profitability.

Consistent profitability looks to be some way off at the moment, though. The company reported third-quarter revenues of €3.6 billion (US$4.64 billion), down 2.8 percent year-on-year but up slightly sequentially, and a net loss of €146 million ($188 million) compared with a net profit of €194 million ($250 million) a year ago. (See Alcatel-Lucent Reports Q3 Loss of €146M.)

The vendor's adjusted operating loss (after one-time costs) for the quarter sunk to €125 million ($161 million), much worse than the €31 million ($40 million) loss reported in the prior quarter.

Things were somewhat different a year ago, though: In the third quarter of 2011, AlcaLu managed an adjusted operating profit of €149 million ($192 million).

The operating losses reported in all three quarters of this year are reflected in the company's gross margin decline, which is clear to see in the table below.

Table 1: Alcatel-Lucent's Gross Margins 2011-2012

Q3 2012 Q2 2012 Q1 2012 Q4 2011 Q3 2011 Q2 2011 Q1 2011
AlcaLu's gross margins 27.9% 31.7% 30.3% 34.4% 35.3% 34.9% 35.3%

For comparison, Ericsson AB (Nasdaq: ERIC) and Nokia Networks reported third-quarter gross margins of 30.4 percent and 32.2 percent respectively.

The vendor explains its dip in gross margin thus: "The year-over-year decline in gross margin results mainly from overall lower volumes, unfavorable product and business mix and unusual high level of reserves. The sequential decline in gross margin mainly results from product and customer mix." In essence, business is worse than it used to be.

In broader terms, CEO Ben Verwaayen noted in his prepared earnings release statement that "our revenue growth and gross margin were impacted by overall carrier spending dynamics and product mix, especially in wireless."

In an effort to improve its margins, AlcaLu is cutting its costs. It signaled its latest cost-cutting initiative, now dubbed The Performance Program, following a full-year profit warning and a grim second quarter, and fleshed out details in September. (See AlcaLu Issues Full-Year Profit Warning, Alcatel-Lucent Could Exit 25% of Services Deals, Alcatel-Lucent to Cut 5,000 Jobs and Alcatel-Lucent: Too Little, Too Late?)

Today the company confirmed it is reducing its workforce by 5,500, about 7 percent of the company's 78,000 staff. Many in the industry question whether that goes far enough. (See AlcaLu Job Cuts to Hit 5,500.)

In addition, AlcaLu notes that it has managed cost savings of €450 million ($580 million) since the beginning of this year and that "five managed services contracts will be addressed by the end of this year." Whether that means the contracts will be terminated or renegotiated isn't clear at this point.

IP division still the shining light
While other Networks divisions such as wireless and optics suffered dramatic year-on-year declines in revenues, the IP systems team continued its run of healthy results, reporting a 30.3 percent increase in sales to €490 million ($632 million). The vendor said that demand for its service router products was particularly strong in Japan, China, the U.S. and Latin America. In addition, it also cited "strong demand for trials of our new 7950 XRS core router in all regions." (See Alcatel-Lucent, Juniper Get Core-Router Upgrades and Alcatel-Lucent, Cisco Clash Over Core Routers.)

For full details on the other Networks units and the performance of the S3 (Software, Services and Solutions) and Enterprise lines of business, read this detailed press release.

— Ray Le Maistre, International Managing Editor, Light Reading

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User Rank: Light Beer
12/5/2012 | 5:18:11 PM
re: Margin Misery for Alcatel-Lucent

Walk away if the customer is asking for a price that is below your cost.  A sale below cost is not a sale at all.  It can put your company into financial ruins.  Let them buy from someone else if they can.

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