Euronews: AlcaLu Needs to Shed 10,000 More

Alcatel-Lucent (NYSE: ALU), Ericsson AB (Nasdaq: ERIC) and Telefónica Deutschland GmbH lead the pack in today's hunt for EMEA headlines.

  • Alcatel-Lucent needs to shed around 10,000 more workers if it is to be truly competitive with the likes of Nokia Networks and Ericsson, according to data gathered by Bloomberg. The numbers reveal that AlcaLu's revenue per employee was €49,700 (US$63,600) last quarter, which was at least 14 percent less than its main rivals, while its selling and administrative expenses as a percentage of sales still stood at 16 percent, compared with 11 percent for Ericsson and 10.5 percent for NSN. (See Alcatel-Lucent Sharpens Its Focus and Margin Misery for Alcatel-Lucent.)

  • It's Ericsson's annual Investor Day today in Stockholm, and to help set the scene the vendor is predicting a CAGR (compound annual growth rate) of 3-5 percent in the global network equipment market from now until 2015, though it believes that growth in its particular segment -- radio, IP and transport, core -- will be slightly higher, at 4-6 percent. (See Ericsson Talks Up Market Growth, Ericsson Feels Networks Squeeze in Q3, Ericsson CTO: Let's Redefine SDN and Ericsson Buys More OSS Smarts .)

  • It's been a surprisingly good third quarter for Telefónica Deutschland, where core operating profits rose 14.1 percent year-on-year in a tough market, reports Reuters. Also on the Telefónica front, the carrier's go-ahead Digital division has launched Instant Servers, an Infrastructure-as-a-Service (IaaS) offering hooked into data centers in Madrid and London. (See Telefónica Digital Offers IaaS.)

  • Belgium's Belgacom SA (Euronext: BELG) has launched LTE services in eight cities: Hasselt, Antwerp, Ghent, Leuven, Liège, Namur, Mons and Waver. (See Belgacom Launches 4G in Eight Cities and Brussels Sprouts LTE Auction Plans .)

  • Dutch incumbent KPN Telecom NV (NYSE: KPN) is close to agreeing a sale of its German towers to American Tower Corp. (NYSE: AMT), according to a Bloomberg report. A price tag in the region of €300-400 million ($383-511 million) is expected.

    In other EMEA news:

    — Paul Rainford, Assistant Editor, Europe, Light Reading

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    yarn 12/5/2012 | 5:18:03 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More

    I tend to compare these type of cost cutting remedies with the ancient practice of bleeding the patient as the cure-all to any ailment. Pat Russo starred in that.

    These 10,000 are not simply sitting on their hands adding cost. Just getting rid of people has many side effects. A higher than average CG&A can be caused by more issues than an "overpopulation" of employees. Just laying off people may seem like drastic action is being taking, but may easily backfire.

    Charles_C 12/5/2012 | 5:18:02 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More

    Don't forget Verwaayen. The time has come for him to find 3 envelopes ...

    paolo.franzoi 12/5/2012 | 5:18:02 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More


    I had a friend once who pulled off a remarkable acheivement.  He took a group of brand new engineers (also was understaffed) and created a brand new system. Unfortunately because of the staffing issues, the product was late and missed the market.  There were some units sold but not enough.  He was quite proud of having pulled off this project.  I told him that it would have been better to not do it at all.  Which is the problem at Alcatel.  They are doing too many things that are not winning and yet they keep investing in them.  Heck 10K layoffs may be too small.  Maybe they need to drop all the non-IP based products and people.  That group seems to do very well.  Working hard and doing things - even excellent things - often adds little to nothing to the bottom line.  Which is all that matters as people get paid to add to the bottom line.

    That is the cold, hard truth.



    FastCache 12/5/2012 | 5:18:02 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More

    They have been living in denial and have failed to display the agility required to transform their business. There are bright spots in e.g. IP but they will suffer also as management will become distracted trying to turn the ship around.  There is a high probability that these guys will follow in the same path as Nortel and Motorola.

    yarn 12/5/2012 | 5:18:01 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More

    I totally agree Seven. You need to make choices. So far I've seen talk about making choices about getting out of markets and managed services contracts that aren't profitable (which is a no-brainer and should be done on an on-going basis). But products is yet another angle because also there the 80-20 rule will apply (20% of products carrying 80% of revenue). But my point was that lay offs should result from making these type of redundany decisions, and not just be an arbitrary number.

    photon2 12/5/2012 | 5:18:01 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More

    Agree here, I read the earnings transcript today, and all I could think of, is 'are these guys in their own bubble?'.  I mean, they are just so unrealistic, who are they listening to internally or externally?  Sad, its true, but I have little sympathy left.


    paolo.franzoi 12/5/2012 | 5:18:01 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More


    You and I greatly agree on that point.  The reason that it is normally stated that way is financial.  A business like Alcatel will have 70% or so of its opex directly attributable to headcount.  Finance types use heads as an equivalent to budget cut math.



    paolo.franzoi 12/5/2012 | 5:18:00 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More


    Access is a funny business.  Traditionally margins have been tight in the space.  Adtran has done well in that regard and we did at AFC as well.  Our margins were about 45% normally although a lot lower on FTTH when we got there.  Most Access businesses work in the low to mid 30s as a margin.

    Can you make money doing it?  Well, yes - if you do it right.  Basically the issue is to build a product at scale.  If you look at Petaluma, there were two big Access Groups there (AFC and DSC/ALU Lightspan) that had literally 10s of millions of Access Lines installed.  At that scale, Access is not a bad business.  Calix has the issue that the C7 was originally designed as a replacement for Litespan in the RBOC space and it has yet to get there.  When deployed in small configurations (we sold a LOT of 48 and 96 line cabinets to the IOCs) the C7 is pretty costly.  It is just a bigger box then mostly required.  Occam had the opposite problem in that it doesn't scale as well to large configurations and never reached the scale required.

    The good news is that a DSLAM or an OLT is basically a global thing.  Theoretically, you can sell the same box to China Telecom that you can to Verizon.  In the POTS days there was T-1 versus E1 and V5.2 versus GR-303 but this is all not a problem in the modern world.  :)

    So, cost both product cost and corporate OPEX management is at a premium for companies in the access space.  We did 3 generations of POTS cards while I was at AFC all to lower the cost.  We did 6 generations of DSL cards.  To give you an idea, when we first introduced DSL cards to the UMC 1000...they cost about $275/port for the card.  By the time I left Tellabs, the cost of DSL was on the same scale as the cost of POTS.  DSL was still more but we could price cabinets for AT&T that were 100% DSL and they could make money and we could as well.  (Most cabinets expected about a 25% take rate of DSL and the cost to dispatch a tech was enough that they could afford to put in 100% Combo cards and still save money).  Cost reduction like that is what drives the bottom line in an access company and is as unsexy as it comes.

    For the techies, of couse a DSLAM is an ATM concentrator.  People used to come after us around ATM patents.  We stripped every feature, function, and gate we could out of our fabrics to save money (our 622Mb/s fabric was $15).  IP attorneys would always come back with to my answers with, "But it is in the standard!  You are supposed to implement that!"  To which, I would laugh and say well you can reveiw the designs and I can tell you we do not do that (like Per VC queueing or a million other expensive things).  

    And that is the essence of an access business.  You have to know how to save money.  John Webley was a master of it (imagine using a ferrite bead as a fuse as well as an EMI filter) and we built off his designs and his legacy.

    The problem with AFC inside of Tellabs is that this whole way of thinking about the business is not the same as other businesses.  The corporate cost structure, the culture, the whole way of doing things is different.  When you think about access, think about this...You know they do a shotgun test on OSP cabinets right?  (They shoot them with actual guns)  Ever thought about what it is to be in that world versus that of a High Density, Long Haul DWDM system?



    ^Eagle^ 12/5/2012 | 5:18:00 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More


    I hear you regards Seven's comment about perhaps keeping IP based products only.

    I would argue that ALU should also keep a few other parts of the eco system as they actually do pretty well in those areas:  Optical transport and switching, signalling for call routing, processing in the "core" part of wireless networks, maybe a few others.  Part of my reasoning is ALU does these things very well, has large market share and strong positive margins in those platforms.  Additionaly, my reason is that these platforms are all converging in many ways and collapsing into IP based boxes with high speed interfaces including native transport optics so you don't need a routing platform and a transport platform that are separate... they are converging and will continue to interoperate and work together over time.  So in this area, ALU has a very strong position.

    Access?  this is an area that Seven is far more qualified to comment on that I am.  I note that in my world view Access is Access.  There seem to be 3 sort of large buckets of access (note: I know many will disagree with my characterization... only my view): 1) fiber based access: PON and the like; 2) copper based access: including DSL. I do note that ALU has some very nice vectoring technology in copper access that in the long term could also apply to other transport technologies to increase capacity.  And ALU seems to have a good market position in the vectoring market.  However, is this a "good" market with sufficient margins?  I don't know. Seven can comment better than I.  and 3) wireless access.  Yes, I look at wireless as an access technology. 

    Wireless: I know conventional wisdom is that wireless platforms are a requirement for a large systems vendor.  However, I believe many of ALU's problems if you drilled deep enough are the wireless divisions that the acquired from others and the increasing competition and finally the structural changes that are coming to wireless.   In the end, the structural changes in wireless might be a key thing that makes ALU rethink wireless.  I think processing and transport and backhaul in the wireless core is a good business.  But not sure about the access part of it.  As wireless migrates to 4G - LTE then LTE Advanced, you will see more and more of a shift to small cells.  Small cells will eventually become like a modem.  a low cost easily produced platform that has low margins... almost a commodity.  So while I really like the LightRadio, in the end, if the trend continues then small cells become almost a commodity widget.  On the access part.  Is this a good long term margin business?  It is when most things are macro cell based.  Not necessarily when small cell based.  Hence my comments about keeping wireless core processing and routing (LTE core is all IP based anyway.. so a natural fit for the IP based product group), and look long and hard at wireless.

    I know my comments about wireless are somewhat counter intuitive.  I know that for now, with Macro cell deployments, Wireless still fits as a good play for large OEM's like ALU.  


    macster 12/5/2012 | 5:17:51 PM
    re: Euronews: AlcaLu Needs to Shed 10,000 More


    Well done for listing the 3 media :p [joking!].

    I like ALU. I like LightRadio. BUt they have had  a tough time. THey have lost many good people. I don't think those in ALU are as good the people with their competitors. Of course, this is just my view and I say this through observation - friends and colleagues leaving ALU for competitors.

    Then, there is the issueof strategy. Just don't know what they are doing! If you look at mobile operators, they will eventually all move to LTE. Data usage (and hence revenue) will continue to increase. I do take issue with the way people segment mobile broadband, but we'll leave it for now.

    From the above, you can see that mobile operators will become more like ISPs. This should be a good starting point for "telling a story", and then illustrate how ALU's portfolio blah blah blah...

    I see this with many other TMT companies, not just telecoms. Here's an example. For one client, the prevailing climate clearly demanded a change of strategy. This means a different way of segmenting, different focus, tweaked set of products, etc. When you tweak or modify or change products, you usually have to do a bit of restructuring. Should be self-explanatory here.

    Then, there's culture. Strategy, company structure and culture are so inter-twined. ALU don't score well here.  

    In short, I agree that they need to shed more jobs. Back when they announced the 5k cuts, I commented that they actually needed to shed an additional 10k (not necessarily retrenching or making redundant, but say, selling bits). It's not "knee-jerk" or anything, but something that's needed to survive.

    Finally, this is an opportunity to make some money in ALU shares, while still possible.



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