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AlcaLu CEO Pitches Recovery Story

Ray Le Maistre
7/30/2009

If Alcatel-Lucent (NYSE: ALU) were fueled purely by Ben Verwaayen's sheer, naked desire to succeed, it likely wouldn't be in its current predicament: reporting operating losses and restructuring like crazy. (See Verwaayen Unveils AlcaLu's New Plan and AlcaLu Appoints Transformer.)

AlcaLu's CEO, 11 months into the job, looked almost fit to explode during today's second-quarter earnings presentation, so determined is he to drag the vendor out of its financial doldrums and back to profitability and growth.

And although AlcaLu reported another operating loss and year-on-year dip in revenues today, Verwaayen reckons his company has turned a corner. (See Asset Sale Helps AlcaLu to Q2 Profit.)

The CEO believes his company is set to report improving sequential financials for the rest of 2009 ("a year of transition," he calls it), experience single mid-digit growth in 2010, and be "a normal company" (growing and profitable) in 2011.

So where's this growth coming from? Geographically, it's coming from North America and Asia/Pacific. "The U.S. is coming back, and we see that continuing in the second half of the year," stated Verwaayen during today's presentation. "Stay tuned. This market will have some great opportunities, and we will take more than our fair share."

It's not all going AlcaLu's way, though. Verwaayen, quite candidly, pointed to the "loss" his company has just suffered at Sprint Corp. (NYSE: S). "I hate to lose," he spluttered. (See Ericsson, Sprint in $5B Managed Services Deal.)

But back to the positive stuff... "And we're growing in Asia/Pacific, thanks to China and India, and that's a pattern for the rest of the year," noted the Dutchman. (See AlcaLu Lands GPON, 3G Deals in China, China Telecom Uses AlcaLu's GPON, AlcaLu's $1.7B China Boost, AlcaLu in Line to Win Reliance Deal, AlcaLu, Bharti Form Joint Venture, and Indian Market Grows 20%.)

"Europe, though, is where the U.S. was a quarter ago. Customers are very cautious –- there are weaknesses there," Verwaayen said.

Table 1: Alcatel-Lucent Q2 Revenues by Region

In � millions Q109 Q209 Change
North America 1,113 1,202 +8.0%
Asia/Pacific 649 861 +32.7%
Europe 1,248 1,286 +3.0%
Rest of World 588 566 -5.4%
Total 3,598 3,905 +8.5%




In terms of technology, Verwaayen is particularly pumped about the prospects for next-generation network deployments of optical -- for example, the recent engagement at NTT DoCoMo Inc. (NYSE: DCM) -- IP service routers, and the wireless wonder that is Long Term Evolution (LTE). (See DoCoMo Starts Afresh for LTE Backhaul .)

Along with the changes and benefits, including "billions of dollars" of potential new business, that the new relationship with HP Inc. (NYSE: HPQ) will bring, Verwaayen picks out LTE as "a flagship of change at Alcatel-Lucent." That's because it's not only a new technology, but because it has "a new business model." (See AlcaLu, HP Combine on IT.)

And the CEO is very keen on stressing AlcaLu's early traction in the emerging LTE market. He noted that while AlcaLu was already involved in a number of high-profile trials, it's also engaged with as-yet-unannounced LTE hopefuls. (See NTT DoCoMo Picks AlcaLu , Nortel's LTE Brain Drain, Core Network Challenges LTE Vendors, CTIA 2009: Verizon's CDMA-to-LTE Helper, and MWC 2009: Verizon Picks LTE Vendors.)

"A lot is happening in LTE around the world, and not all of it is announced. We are extremely well positioned," boasted Verwaayen, hinting at further engagements.

AT&T Inc. (NYSE: T) would be a fine feather for any company's LTE cap, though. (See AT&T: Hurry Up & Wait .)

Verwaayen also stressed the importance of video to AlcaLu's new vision, noting that while this week's acquisition Velocix "might be small," it is "strategically important." (See AlcaLu Buys CDN Specialist Velocix and Velocix: Verizon Deal Changed Everything.)

Sequential growth, technology ups and downs
While AlcaLu's year-on-year numbers reflect a market that's set to shrink by around 10 percent (give or take a few percent either way) in 2009, Verwaayen notes that the second quarter was an improvement on the first, and that the trend should continue throughout 2009.

Table 2: Alcatel-Lucent Q2 vs Q1
In � millions Q109 Q209 Change
Revenues 3,598 3,905 +8.5%
Gross margin 31.5% 33.1% Improved
Adjusted operating income -254 -62 Improved




Table 3: Alcatel-Lucent Q2 vs Q1 by Division
In � millions Q109 Q209 Change
Carrier 2,219 2,384 7.4%
Applications Software 255 260 2.0%
Enterprise 245 258 5.3%
Services 797 873 9.5%
Other and eliminations 82 130 58.5%
Total 3,598 3,905 8.5%




The trick, reckons Verwaayen, is to focus on the technologies and services that can boost a service provider's near-term prospects. He cites WCDMA (3G), which he positioned as a technology that enables a broader range of wireless applications, particularly video, as an example.

And AlcaLu has been doing better in WCDMA. With sales up 24 percent compared with a year ago, it's one of a number of technologies that have experienced double-digit year-on-year sales growth, notes the CEO. The others are IP service routers (driven by growing video traffic), submarine optical systems, and even CDMA (up about 40 percent). "Where customers can make a difference to their business, they'll invest," Verwaayen repeated a number of times.

Even IMS (IP Multimedia Subsystem) solutions are, at last, gaining traction as carriers look for new ways to generate revenues and launch new applications: That's a trend across the industry, it would seem. (See Huawei, Ericsson Get a Piece of Comcast's IMS Action , Acme's Euro IMS Duo, and IMS in the Spotlight.)

Those are examples of technologies that, along with the Services and Applications Software divisions, are experiencing "terrific" demand. Conversely, others are "really feeling the heat," notes the CEO. Those include GSM (down almost 50 percent), Time-Division Multiplexing (TDM) switching (as has been the case for some time now), Enterprise solutions, and fixed access (DSL).

— Ray Le Maistre, International News Editor, Light Reading

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gocowboys
gocowboys
12/5/2012 | 3:59:33 PM
re: AlcaLu CEO Pitches Recovery Story


It looks like revenue went up proportionally more than gross margin indicating either more discounting or a lower margin mix. Losses appear much lower and I would surmise that this is due somewhat to revenue improvement and operational cost cutting.


I would view the optimism around LTE to be a bit over blown. Ericsson and Huawei appear to be the market leaders and the only domestic potential ALU LTE positional strength seems to be at AT&T Wireless. Even there, I doubt that they will be the only vendor.


Personal view is that the IP products appear to be doing well in the market; I believe that ALU is losing ground in an number of other areas. It would be interesting to see the financials associated with the product areas. I would expect optical to be fading.

FbytF
FbytF
12/5/2012 | 3:59:31 PM
re: AlcaLu CEO Pitches Recovery Story
Adjusted operating income for 2 qtrs is -316M table 2, if 300M hadn't been spent on restructuring ALU would almost have been profitable, restructuring cost are layoffs, severance is basically paying several months salary to take out the headcount, 2 more quarters of restructuring costs will compound the losses but in 2010 will look like the business has turned around and in reality all will reflect is the reduction in restructuring costs. Magic!
desiEngineer
desiEngineer
12/5/2012 | 3:59:30 PM
re: AlcaLu CEO Pitches Recovery Story


FbytF: 2 more quarters of restructuring costs will compound the losses but in 2010 will look like the business has turned around and in reality all will reflect is the reduction in restructuring costs. Magic!


That is part of the business turning around - spend less to do the same or more and your bottom line goes up.  No magic to it.


        Revenue - Cost = Profit


All Ben is doing is reducing Cost.


What is more salient here is whether Revenue is decreasing substantially, thereby offsetting the Cost reduction.  You seem to imply that increasing Revenue is the same as a business turning around, and I think that is a narrow view of business operation.


-desi

Riders in the storm
Riders in the storm
12/5/2012 | 3:59:29 PM
re: AlcaLu CEO Pitches Recovery Story
Magic??? Maybe, if you consider "Magic Ben's" trics. Look at what he did with BT, all smoke and mirrors (Global Services, anyone??), pretended he turned BT around, left with a perfect timing, only for the skeletons to fall out of the closet long after his "package" was already on the bankaccount.
ALU today: Look Magic Ben is repeating his trics. Lot's of marketing blablabla (must admit: he is a master in this), smoke and mirrors (LTE, China, US, etc), turns the company into a "profit" (sure, with the handsome help from Thales!!), stips the costs.
Next chapter: prepare maybe for a sale (HP)?
One thing is for sure with "Magic Ben": he will time his departure from ALU very masterly. Poor souls that are left behind...
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