Global Insight Perspective | |
Significance | Alcatel-Lucent is now looking for another chair and CEO. |
Implications | Their successors face a weak macroeconomic environment and the need to turn around the vendor’s Carriers segment. |
Outlook | Although the outlook for 2008 is modest, Alcatel-Lucent is moving in the right direction as it seeks to replace declining sales of traditional products with next-generation network sales. |
Serge Tchuruk and Patricia Russo, the chairman and CEO of Alcatel-Lucent, have resigned. Their departure follows the company’s sixth consecutive quarterly loss. In the second quarter of 2008 Alcatel-Lucent reported revenues down 5.2% and an adjusted net loss of 222 million euro (US$349.1 million). The vendor also recorded a goodwill impairment charge of 810 million euro, primarily relating to uncertainties over CDMA capital expenditure in the U.S.
On the revenue side, it is Alcatel-Lucent’s Carriers segment which is suffering most. Carriers accounts for over two-thirds of the vendor’s revenues: revenues in this segment fell 9.4% year-on-year (y/y). Revenues at Services, Alcatel-Lucent’s second-largest segment, rose 9.1% y/y, while Enterprise grew 2.7%. In the second quarter, Alcatel-Lucent’s largest segment was the least profitable on the basis of operating income, showing profit of 11 million euro, compared to 71 million at Services and 29 million at Enterprise. The weakness of Carriers was due to a variety of factors, including double-digit revenue decline in its fixed access business, a continuing decline in ATM switching sales, which pulled back data networking revenues, and a sharp contraction in CDMA sales.
Across its Carriers segment Alcatel-Lucent is trying to mitigate the contraction of its traditional products with stronger sales in its next-generation products. Currently, in the fixed-access segment, strong fibre-to-the-x (FTTx) sales are not enough to offset lower sales of xDSL systems. In the core switching area, fixed and mobile NGN is now nearly up to the size of TDM switching, while in the mobile network area, W-CDMA sales are strong, particularly in emerging markets. Optical networking and applications are also seeing strong revenue growth.
In the Enterprise segment, revenue growth is being driven by data networking and IP telephony, security solutions, and contact-centre activity, while in the Services segment, Alcatel-Lucent is doing well from managed services (for operators) and network integration.
Outlook and Implications
- Uncertain Outlook for 2008: In her outgoing quarter Russo said that a slowdown in fixed spending in Europe was possible, but said that mobile access and Services would perform strongly in 2008. She predicted that the global telecoms equipment and services market would remain flat (in terms of constant currency). Alcatel-Lucent itself, she noted, would see flat or slightly lower revenues in the third quarter on a sequential basis and an operating margin in the low to mid single-digit range in the full-year 2008 on 2-5% lower revenues. This modest outlook is partly due to Alcatel-Lucent’s considerable exposure to the weakening U.S. dollar, but the global economy and competitive pressures are playing their part. Alcatel-Lucent is not alone in feeling these pressures and moving to cut costs. Ericsson is turning the corner after a difficult 2007 (see World: 22 July 2008: Ericsson Q2 Sales Up 2% as Fortunes Rebound), while Nokia Siemens is also faring better (see World: 18 July 2008: Nokia's Q2 Revenue Up 4% but ASP Keeps Falling). Neither, however, were involved in such large consolidation activity as Alcatel-Lucent
- Market Welcomes Resignations: The resignations of Tchuruk and Russo were welcomed by the market with share prices heading north. Nevertheless, their successors will have no easy task in steering the company towards revenue growth in the context of sharp competition from its European and Asian vendors and a flat infrastructure market in 2008.