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Alcatel Says Recovery on Track

Light Reading
News Analysis
Light Reading
11/20/2003
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Alcatel SA (NYSE: ALA; Paris: CGEP:PA) says it expects all its businesses to be profitable in 2004 before goodwill reductions.

During an online analyst conference, the company's CFO, Jean-Pascal Beaufret, highlighted the company's cost-cutting efforts during the past two years and set out the company's financial vision for 2004. His key messages were:

  • Gross margins and net income (before goodwill and restructuring costs) are up, even though year-on-year sales are down (see Alcatel Q3 Sales Slip).
  • Gross margins as a percentage of sales are higher now than in 2000. For the first nine months of 2003, gross margins stand at 32 percent on sales of €9.14 billion (US$10.89 billion), compared with a gross margin figure of 29 percent for 2000. In 2001 the figure was 25 percent, and in 2002 it was 26 percent.
  • Alcatel has saved money by outsourcing (15 sites in the past 24 months), introducing common internal processes, reducing inventory, automating customer interaction, and reducing headcount –- the vendor expects to have 60,000 staff by the end of this year, compared with 77,000 at the end of 2002, 101,000 in the fourth quarter of 2001, and 119,000 at the end of 2000. The company has nearly completed its restructuring process, says Beaufret.
  • The company has reversed its net cash and debt position from a deficit of €5.46 billion in the third quarter of 2001 to a positive €540 million in the third quarter of this year.
  • Fourth-quarter 2003 sales are expected to be up by more than 20 percent quarter on quarter, which would mean a leap to at least €3.6 billion from the €3 billion posted in the third quarter.
  • Alcatel should generate profitable income from operations for the full year 2003, with goodwill and non-recurring charges accounting for net losses.
  • The objective for 2004 is for all business lines to be profitable before goodwill reductions in 2004.
All well and good; but how is Alcatel positioned to achieve this from an overall strategic point of view? Heavy Reading chief technologist Geoff Bennett, who profiled Alcatel in his recent report “Setting a Course to Convergence: The Incumbents’ Wireline Strategies” (see Incumbents Converge on Convergence), says the company has "an extremely strong product portfolio, and an enviable installed base of incumbent operator customers," mostly in Western Europe.

Bennett says one of Alcatel's biggest strengths is that it "takes very courageous decisions; sometimes they work, sometimes not." The company's DSLAM strategy -- sell its products for a very slim margin at first to build a market-leading position, reap the benefits from economies of scale and higher margins later -- is a classic example of when a bold approach worked. "Broadband has captured the imagination of operators everywhere, so that was a very good move," says the Heavy Reading man.

One instance where its courage came to nothing is Alcatel's core multiservice box strategy (see Alcatel Redraws Router Strategy). "It entered a very tough market with its 7770 device. Technically it was a great box, very reliable. But the economics of the core IP market got the better of it. There aren't many sales there at the moment, and when there are they go to Cisco Systems or Juniper Networks," says Bennett.

He also notes that Alcatel's culture and geographic spread have meant it has taken longer for the company to restructure and reach a profitable position. "Alcatel is very French," says Bennett, flaunting his penetrating insight.

As a result, Alcatel has cut some staff in other territories, such as the U.S., rather than on its home turf, to get the numbers and costs down quicker. "This has left Alcatel with some dead wood in France, and having cut into some of its muscle elsewhere. It's noticeable that Nortel Networks managed to return to profitability more quickly," and even Lucent Technologies has been more reactive than the French giant, adds Bennett.

As this article was published, Alcatel's share price was up 27 cents (2.18 percent) at $12.64.

— Ray Le Maistre, International Editor, Boardwatch

“Setting a Course to Convergence: The Incumbents’ Wireline Strategies” is published in PDF format and is available now for $3,800. To read the executive summary and purchase the report,click here.

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