Amid Rising Losses, Alcatel-Lucent CEO Leaving

Story first appeared on US News -

Alcatel-Lucent CEO Ben Verwaayen is leaving the loss-making French-U.S. telecommunications gear maker after a failed four-year bid to turn the business around.

Verwaayen said in a statement Thursday that it was "clear to me that now is an appropriate moment" for Alcatel-Lucent to seek new leadership. Investors cheered the news, with shares jumping 7.7 percent in early trading to €1.40.

The Dutchman's surprise departure comes as Alcatel-Lucent reported losing €1.37 billion ($1.85 billion) last year, compared with a €1.1 billion gain a year earlier.

No details on Verwaayen's replacement were provided. He has agreed to stay on as caretaker until a successor can be found. Alcatel-Lucent said it will look at candidates both internally and from outside the company.

Verwaayen joined Alcatel-Lucent in 2008 after the ouster of the previous management led by American Patricia Russo. Russo and her French counterpart Serge Tchuruk had masterminded the $11.6 billion merger of Lucent of the U.S. and Alcatel of France. The combined company has racked up many billions of euros in losses since its creation in 2006, something Verwaayen has spent four years trying to reverse.

Alcatel-Lucent supplies telecom operators and corporations the technology for building global communications networks. It has suffered from repeated rounds of costly layoffs and restructuring, as well as intense competition from the likes of Ericsson of Sweden, China's Huawei and Nokia Siemens Networks, a Finnish-German joint venture.

The Franco-American company is in the middle of a €1.25 billion restructuring program aimed at cutting 5,500 jobs, ending unprofitable contracts and leaving or reorganizing operations in poor markets.

Verwaayen said Thursday the company has "seen progress" on the plan announced last July, and pointed to growth in its order book as a sign of customer confidence.

Alcatel-Lucent had aimed to raise its profitability from the 3.9 percent adjusted operating margin achieved in 2011, but abandoned that target halfway through the year. It finished 2012 with an adjusted operating margin of only 2.9 percent.

Last year's earnings were hit by a further €1.4 billion charge as Alcatel-Lucent continued to account for the falling value of past acquisitions and its own fixed assets.

Verwaayen was lauded on arrival in October 2008 after for transforming BT Group from a troubled, loss-making phone operator into a profitable and aggressive leader in broadband Internet access. But Alcatel-Lucent proved to be a tougher challenge than expected. Sales slid 5.7 percent last year to €14.4 billion and the group continued to burn cash, recording a seventh-consecutive year of negative cash flow.

Whoever steps in to replace Verwaayen will have to uncover a fresh path to profitability, after seven years of restructuring failed to achieve goals set out at the company's creation.

The Alcatel-Lucent tie-up was designed to boost margins through cost and research and development savings, while improving the joint company's pricing power with telecom operators, its largest customers.

The combination was seen as creating the critical mass needed to compete with the likes of China's Huawei Technologies Co. and Ericsson AB of Sweden.

But intense competition in the telecoms industry has meant many of the savings have been used on discounts passed to customers, and analysts said Alcatel-Lucent has not coped as well as some of its competitors.

Alcatel-Lucent Making All The Right Cuts To Stem Net Losses

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."