Originally Posted in The Wall Street Journal.
Telecom-equipment maker Alcatel-Lucent reported a fourth-quarter net loss of 3.89 billion euros ($5.07 billion) because of a write-down related to aging technologies and deteriorating market conditions, yet the new chief executive said there are signs that a turnaround is under way.
After five months on the job, Alcatel-Lucent Chief Executive Ben Verwaayen has made progress on several problems that hurt the company's margins and profitability last year.
The company has stemmed losses on a wireless technology, known as W-CDMA, by dropping overlapping product lines. Alcatel-Lucent had promised to halve the losses in that wireless line last year. In an interview, Mr. Verwaayen said the company has exceeded that goal.
In China, where Alcatel-Lucent last year undertook the controversial strategy of cutting prices on mobile technology so as not to lose market share, the company is now well-positioned to win new contracts, Mr. Verwaayen added.
These are "positive signs" that Alcatel-Lucent is on the right track, Mr. Verwaayen said, adding that the company met its targets for cash flow, revenue and profit. "But we still have a lot of work to do to convince our shareholders that this is a management team that will deliver," he said.
Investors sent Alcatel-Lucent's shares up 2.5% to close at 1.50 euros in Paris on Wednesday.
In its earnings statement, Alcatel-Lucent said fourth-quarter revenue fell 5.3% to 4.95 billion euros from 5.23 billion euros a year earlier. Analysts had forecast revenue of 4.9 billion euros, so the results came in largely in line with market expectations.
Pierre Ferragu, a London-based analyst at Sanford C. Bernstein Ltd., said the "fairly good" fourth-quarter result showed that "the change in management is bearing fruit." But he cautioned that Alcatel-Lucent still faces major challenges, such as its weak wireless technology and an overreliance on the fixed-line phone business, which was starting to decline in some markets. Expansion into business VOIP services could be a good move for Alcatel-Lucent.
The 3.91-billion-euro write-down announced by the company Wednesday reflects "weaker market conditions" and Alcatel-Lucent's decision to abandon some aging technologies in favor of new, higher-growth technologies such as mobile SEO, said Chief Financial Officer Paul Tufano.
In the fourth quarter of 2007, the company had announced a net loss of 2.58 billion euros, also because of a write-down on CDMA assets. Alcatel-Lucent, like all companies, must regularly assess the value of its intangible assets, known as goodwill, which include its reputation, customer base and work force.
Beyond the write-down, Alcatel-Lucent faces a tough year ahead as big telecommunications operators such as Verizon Communications Inc. and Vodafone Group PLC slow their spending on fixed, mobile and Internet networks. The economic downturn means fewer customers will sign up for pricey new services such as mobile television, or data colocation so the operators have little incentive to invest in equipment.
Analysts expect capital expenditures at telecom companies to fall this year. Alcatel-Lucent says the market for telecom equipment could drop 8%-12%, while its rival Nokia Siemens Networks—a joint venture between Nokia Corp. and Siemens AG—expects at least a 5% decline. Telefon AB L.M. Ericsson, a leading maker of wireless-phone networks, predicts a flat market.
Alcatel-Lucent has been unprofitable since it was created in a merger between Paris-based Alcatel SA and Lucent Technologies Corp., based in Murray Hill, N.J., in December 2006. Linking Alcatel with Lucent was supposed to create a company big enough to weather rising industry competition and consolidation among the telecom operators that buy equipment. Instead, the new company was forced to cut prices as rivals tried to pick off its customers, hurting profitability. Planned cost savings from the merger didn't materialize.
Mr. Verwaayen was brought in last summer to turn the company around, and revive a work force traumatized by fallout from the merger. In December he announced a companywide effort to ratchet down costs to improve profitability, as well as a new strategic focus on innovation and certain new technologies such as fourth-generation mobile products known as LTE. He promised 750 million euros in savings this year through staff cuts, better procurement strategies and stricter pricing policies with customers.
"We need to do more to expand our margins," Mr. Verwaayen said. "But from a psychological point of view, I think we're making progress."
