Alcatel-Lucent Q3 Loss Deepens as Vendor Crisis Continues

Alcatel-Lucent has seen its net losses deepen in the third quarter of the year, as its net income fell to a loss of 182 million euro (US$269 million), down from a loss of 40 million euro in the same quarter in 2008, and a loss of only 14 million euro in the second quarter 2009.

The French telecoms equipment vendor has seen its third-quarter revenue fall 9.3% year-on-year (y/y) to 3.69 billion euro, below analyst expectations, although the group has reported an improvement in its earnings (operating) loss, at 76 million euro in the quarter, beating its losses of 85 million in the third quarter of 2008, and 130 million in the second quarter of 2009, as cost-cutting takes effect.

Alcatel-Lucent said it is still on target to break even at an adjusted operating level in 2009 and the company still aims to make a net profit in the second half of 2010. Chief Executive Ben Verwaayen said he expected Alcatel-Lucent's addressable market to be down between 8% and 12% at constant currency in 2009, and that the vendor expected the market to return to growth of 5% or less next year.

Outlook and Implications

• Still No Sign of a Return to Profit for Alcatel-Lucent: Alcatel-Lucent has struggled since it was formed in 2006, when French vendor Alcatel bought U.S. company Lucent Technologies, in merger which was supposed to give the vendor more operational muscle to compete with rivals. Telecoms operators, who make up Alcatel-Lucent's core customer base, are struggling with increased competition and regulatory pressure, and drops in their own customer spend due to the ongoing economic crisis. Alcatel-Lucent's quarterly report represents the twelfth consecutive quarter of net loss, marking three years in the red as the vendor is hit hard by the cutback in operator spend. As the network-equipment market slump continues, the vendor is now looking to the services sector for growth (see World: 9 September 2009: Alcatel-Lucent Denies Need for Massive Consolidation in Equipment Market, Targets Services Sector for Growth), but there is now little doubt that Alcatel-Lucent must turn the corner in the next 12 months if it is to survive.

• Cost-Cutting Keeping the Wolf from the Door: Alcatel-Lucent says it has achieved 80% of the 750-million-euro cost-cutting measures it had targeted for 2009 but there is further speculation the group may be about to slash further jobs as it struggles to reverse its fortunes (see Europe: 22 October 2009: Union Claims Alcatel-Lucent to Cut One in Six European Jobs). As well as a shift in focus to the services sector, the company has also hinted it may be close to divesting at least one of its non-core assets, saying negotiations are in the late stages and it hopes to have something to announce by the end of the year. The company has seen some signs of growth in its promising 4G networks sector (see World: 12 October 2009: Alcatel-Lucent Pleased with First LTE Tests in Germany), but faces an uphill climb in the face of cuts in operator capex and fierce competition. Despite the gloomy results, Alcatel-Lucent's shares have climbed 86% this year, as investors gamble that it will eventually benefit from economic recovery.

• Is There Any Light at the End of the Vendor Tunnel? In the last fortnight, European telecoms giants, including France Telecom, the Nordic giants TeliaSonera, Telenor, and Tele2, and Dutch telecoms group KPN, are reporting few signs of recovery in their markets (see France: 29 October 2009: France Telecom Q3 EBITDA Down 8%, Sees Gloomy Outlook)—and many are continuing to rein in capex and network investment, something which will directly hurt the vendors well into 2010. One shred of comfort for Alcatel-Lucent is that its rivals are also feeling the pinch, with leading vendor Ericsson recently reporting lower-than-expected earnings, blaming tough pricing conditions and slower spending by customers in emerging markets (see World: 22 October 2009: Ericsson's Q3 Earnings Down 3% as Equipment Market Slowdown Bites). Likewise, Nokia Siemens Networks (NSN) owner Nokia was forced last week to take a 908-million-euro write-down of the value of the equipment vendor (see World: 16 October 2009: Nokia Swings to Q3 Operating Loss, Writes Down NSN b US$1.3 bil.), as NSN posted falling third-quarter sales. However, the vendor has now said it now expects the mobile infrastructure market to fall only 5% in 2009, an improvement on its previous expectations for a 10% drop. The European vendors are seeing some tough pricing competition from the two key Chinese vendors, Huawei and ZTE; however, Alcatel-Lucent has managed to make some inroads into the tough Asian markets of late (see South Korea: 20 October 2009: SK Telecom, Alcatel-Lucent Co-Operate to Develop Next-Generation Network Technologies). NSN opined some months back that there was only room for three or four global vendors and it expected to see consolidation in the European market in the near future. Key U.S. equipment maker Nortel has already become the first vendor to fall foul of the economic downturn, and as Alcatel-Lucent continues to struggle (lacking the big-money backers NSN enjoys) the French vendor is once again the favourite to be the first major victim of the recession in European telecoms.