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Trick or Treat for Russo?

Ray Le Maistre
10/30/2007

Just how scary could Halloween be for Alcatel-Lucent (NYSE: ALU) CEO Patricia Russo, the giant vendor's investors, and its staff?

Much will depend on her performance today in front of the AlcaLu board and tomorrow on her company's third-quarter earnings conference call.

Investors and analysts will be hoping for a treat rather than a trick, while the company's staff face the prospect of further job cut announcements.

Following an Extraordinary Board Meeting on September 12, the day before the full-year profits warning was announced, Russo was given until today to come up with a new corporate plan, being presented to the vendor's board today, that can turn around the company's ailing fortunes and give its stock a boost. (See Tough Month Ahead for AlcaLu's Russo and AlcaLu Cuts 2007 Outlook by $1.25B.)

And it needs a boost badly. AlcaLu's share price stands this morning at €6.64 (US$9.58), down 34 percent since the company opened its doors on December 1, 2006, when the share price stood at €10.12 ($14.60), and down more than 39 percent this year.

So what's in the cards from Russo?

Further restructuring
Analysts expect the new corporate plan to focus on further headcount reductions beyond the currently planned 12,500 and, potentially, a shakeup of the vendor's mobile infrastructure portfolio. (See Alcatel-Lucent Job Cull Hits 12,500.)

The team at Dresdner Kleinwort expects Russo to "step up the scale and scope of the restructuring programme to cope with greater-than-expected market share losses and harsher-than-envisaged pricing conditions." They envisage an additional 3,000 to 4,000 jobs being axed.

The CEO also needs to act "prudently and swiftly to adjust the bloated cost base to the harsh realities of the market environment," they added in a research note.

Such actions should include reducing "risk exposures in loss-making activities," such as 3G, where Dresdner feels AlcaLu would benefit by halting development of the UMTS access platform acquired from Nortel Networks Ltd. for $320 million. (See Alcatel Snags Nortel 3G Unit and ALU Completes UMTS Buy.)

The company should also "accelerate asset disposals," reckon the analysts, something that Russo is already addressing. (See AlcaLu Sells Avanex Stake.)

Nomura International analyst Richard Windsor agrees that mobile and headcount issues are likely to be the key elements of further restructuring.

AlcaLu's GSM and 3G/UMTS infrastructure business has been hit hard this year as Ericsson AB (Nasdaq: ERIC), despite its own recent blip, has "continued to prey on weaker competitors," noted Windsor in a recent research paper. "Some very hard questions need to be asked about the viability of Alcatel-Lucent’s presence in this business." (See Profit Warning Slams Ericsson and AlcaLu's Russo: We're Under Attack!)

"All eyes will be on the accelerated restructuring plan and GSM/UMTS," states Windsor in an email to Light Reading.

Q3 improvements
As for the third-quarter earnings report, the Dresdner team is expecting AlcaLu to break even at an operating profit level from revenues of between €4.4 billion and €4.6 billion ($6.3 billion and $6.6 billion, down 9 percent year-on-year), while earnings are likely to be negative, possibly around €0.10 per share.

That contrasts with the second quarter's operating loss of €206 million ($297 million) from revenues of €4.33 billion ($6.24 billion). (See Alcatel-Lucent Slumps on Q2 Loss .)

The fourth quarter should improve further, reckons the Dresdner team, when AlcaLu should manage an operating profit and greatly improved revenues.

Nomura's Windor envisages a small third-quarter operating profit of around €11 million ($15.9 million) from revenues falling just short of €4.4 billion ($6.3 billion), and an operating profit of around €152 million ($219 million) from revenues of just more than €5 billion ($7.2 billion) in the fourth quarter.

Alcatel-Lucent will publish its third-quarter earnings press release at 7:45 a.m. Paris time (2:45 a.m. New York) on Wednesday, October 31. Russo will host an earnings conference call later in the day at 1 p.m. Paris time (8 a.m. New York), by which time investors will know whether they're getting a trick or a treat.

— Ray Le Maistre, International News Editor, Light Reading

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