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TELECOMS AND SOFTWARE NEWS
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Alcatel-Lucent says 'adieu' to Russo and Tchuruk, hello to the next phase
Dana Cooperson, Julien Grivolas
Alcatel-Lucent says 'adieu' to Russo and Tchuruk, hello to the next phase
On 29 July Alcatel-Lucent made two announcements. First, it announced underwhelming 2Q08 results, although the company met its quarterly guidance and affirmed its targets for the rest of the year. Second, and with more lasting impact, it announced the impending departure of CEO Patricia Russo and Chairman Serge Tchuruk. The leadership change is a much-needed signal that the company is ready to move into the post-merger period. Financial analysts were expecting Alcatel-Lucent to post a loss of around €135 million for 2Q08, but the vendor reported a €1.1 billion loss, mainly due to a goodwill impairment charge of €810 million following the unexpectedly steep drop in North American CDMA revenues. After reporting losses for the sixth quarter in a row and having the share price decline 60% since November 2006, the company finally acknowledged that it was time, as Russo said, for new leadership with an “independent and fresh perspective.” Despite Russo's claim that the merger process is now behind the company and it is on track with its objectives, the new CEO's task will be challenging.Where are the issues? CDMA labeled the biggest culprit
Alcatel-Lucent's wireless business has been badly impacted by a faster-than-expected decline in the CDMA business, particularly in the US where its most significant CDMA customers are. Even though CDMA business opportunities still exist in emerging countries, the company noted that these are not enough to compensate for its exposure in North America. In emerging countries, the CDMA competition with the Chinese vendors (ZTE in particular) is intense. As a consequence, Alcatel-Lucent decided to reflect the uncertainty regarding CDMA spending in North America by making more cautious assumptions for CDMA sales over the next five years, which led to the non-cash impairment charge of €810 million mentioned earlier.More globally, Alcatel-Lucent is riding multiple horses in the wireless infrastructure segment. On one hand, this can be perceived as a competitive advantage, enabling the company to serve more market opportunities and protecting it against difficulties that may arise in a particular market. At the same time, however, supporting multiple wireless standards requires more resources to be dedicated to R&D, product development, marketing, sales, and support. Today, Alcatel-Lucent is the only Western vendor to offer or develop products for all wireless technologies (GSM, UMTS/HSPA, LTE, CDMA2000, WiMAX). The only other vendors doing so are Chinese companies ZTE and Huawei, but their cost structure and access to capital are more favorable than Alcatel-Lucent's. Scale is vital
In telecoms - a very challenging market due to significant price competition and buyer power - scale is vital. Without significant scale, profitability suffers. In that context, mergers are presented as the best means to create scale. However, simply adding more product lines does not create scale - the vendor must also go through a painful product rationalization process before reaping scale benefits. For example, in its UMTS business, Alcatel-Lucent had three different product lines to rationalize after the purchase of Nortel's UMTS business. As a first step, Alcatel-Lucent kept selling Lucent's solutions to AT&T while replacing Alcatel's Evolium UMTS products in favor of Nortel's UMTS radio solutions elsewhere. The next step is to move to a single, common platform before the end of 2008. Product rationalization has an obvious R&D cost - the need to build a common platform - but it also has a marketing cost as the vendor needs to keep customers of discontinued platforms on board. In addition, competitors will try to benefit from any discontinuities and grab market share. This is what Ericsson and Huawei did last year at the expense of both Alcatel-Lucent and Nokia Siemens Networks. The good news is that much of Alcatel-Lucent's rationalization process is now behind it. The company announced strong WCDMA sales at AT&T, SKT, KTF, and Orange during 2Q08. Its WCDMA revenues grew by 60% versus the year-ago quarter. In addition, it claimed that it is in line with its objective to halve operating losses in WCDMA (and NGN/IMS) for fiscal 2008. The company also said that it now sees stronger demand than expected for UMTS and GSM, especially from Asia and China. Even in the early post-merger stage, Alcatel-Lucent maintained strong GSM sales, especially in emerging countries, thanks to the new GSM product line (TWIN TRX and ATCA BSC) introduced in early 2007. It has a strong GSM position in emerging markets and should be able to leverage this in the future for new GSM expansion plans and UMTS introductions.Moving forward
Alcatel-Lucent went 'live' in December 2006, less than two years ago. The company has accomplished a lot in a short time, but it needs to do more. A change in the upper management signals that the company is ready to shed its Alcatel‑plus‑Lucent past and become something new. The company continues to execute well in many areas. With additional product line rationalization and additional focus on services and growing infrastructure markets, we are optimistic that better days are yet to come.
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