| Good article from Reuters that summarizes the quarter and the issues that ALU and the whole sector face going forward.|
Alcatel-Lucent cuts profit goal, revival in doubt
By Leila Abboud and Marie Mawad
PARIS | Fri Nov 4, 2011 9:57am EDT
(Reuters) - Alcatel-Lucent scaled back its profitability goal for the year, raising new doubts about Chief Executive Ben Verwaayen's ability to turn around the long-struggling telecom equipment maker.
The Franco-American group, like rivals Ericsson and Nokia Siemens Networks, is suffering as telecom operators cut spending on their networks in reaction to macroeconomic uncertainty, especially in Europe.
The gathering clouds are particularly bad news for Dutch-born Verwaayen, who pledged to make Alcatel-Lucent a "normal company" again when he took the helm two years after a value-destroying merger rocked the company.
Analysts say that aim may now be further from reach after a disappointing third quarter that saw Alcatel-Lucent's cash burn -- long a problem for the still-fragile group -- accelerate to roughly 1 billion euros in the year to date.
The group was also forced to abandon its goal of being cash flow positive this year, pushing it off to next year.
"In our view the company has distanced itself further from becoming a 'normal company'," wrote Thomas Langer, analyst at WestLB in a note.
Alcatel-Lucent fell more than 14 percent, making it the biggest loser on France's blue-chip index and sending shares to lows not seen since early 2009.
The company said it was now aiming for an adjusted operating margin of around 4 percent for the year, down from its prior goal of above 5 percent.
The more cautious tone comes after rivals Juniper Networks, Ericsson and Nokia Siemens Networks also warned that the gloomier global economic outlook would likely lead telecom operators to cut their spending.
To cope, Alcatel's Verwaayen promised a renewed cost-cutting program aimed at generating extra savings in 2012 of 200 million euros ($275 million) in fixed costs and 300 million in variable costs.
"Given economic uncertainties, we will take more radical actions," he said. "You will see us increase our efforts on cost control and cash flow."
Verwaayen also said it was too early to know how telecom operators would behave next year. Telecom network investments track with GDP growth because operators tend to claw back their spending when their customers become more price conscious.
"The market is uncertain, and it's not just because of the economic crisis," Verwaayen said about the outlook for 2012.
"There are also unknowns about how Europe will regulate fiber broadband buildouts, and other regulatory uncertainties elsewhere."
Analysts from RBS, Societe Generale and Nomura predict that the telecom equipment market will shrink 0-5 percent in 2012.
The impact of the weakening economy has already begun to weigh on Alcatel-Lucent as third-quarter revenue slipped 6.8 percent to 3.8 billion euros compared with a year earlier, with double-digit declines in Asia and Europe.
The U.S., where Alcatel-Lucent's major customers AT&T and Verizon.have been spending heavily on mobile networks, held up better with a decline of only 0.3 percent.
The company's adjusted operating income was 173 million euros, boosted by a one-time gain of 28 million from licensing fees. Stripped of that gain, operating margins for the third quarter were actually 3.8 percent.
The results missed analysts' average expectations of sales of 3.99 billion euros and earnings before interest and tax (EBIT) of 158.5 million, according to Thomson Reuters I/B/E/S.
"Beyond North America, Alcatel-Lucent struggles to find avenues for growth and is losing ground in Europe," said Bernstein analyst Pierre Ferragu in a note.
Alexandre Peterc, analyst at Exane BNP Paribas, also expressed concern about Alcatel-Lucent's continued high pace of cash burn, adding that it was "very bad" in the third quarter.
"They don't have good control over their working capital."
Chief Financial Officer Paul Tufano said as recently as July that the group hoped to have positive free cash flow this year by paying closer attention to managing its inventory.
But on Friday he told Reuters that that aim was now out of reach, adding that free cash flow would end up at "similar levels as last year if it is not slightly better."
Last year, free cash flow was negative 818 million euro.
Tufano and Verwaayen both pledged to make free cash flow a central focus next year and vowed new discipline on everything from product stocks to not taking money-losing contracts.
"We are going to build our plan for 2012 to drive positive cash flow," said Verwaayen. "We are pretty confident we can make it work.
Much will depend on what happens in the United States, where Alcatel-Lucent generates one-third of its revenues.
In the past few years, the company has surfed a wave of investments in U.S. mobile networks as operators try to keep up with consumers' appetite for smartphones and tablet computers.
The U.S. boom has also boosted Alcatel-Lucent's margins because the market is effectively closed to low-cost Chinese competitors like Huawei and ZTE Corp over concerns about the security of key national infrastructure.
Asked whether U.S. operators would also slow spending in the end of the year, Verwaayen demurred.
"We are strong in the U.S. and will remain so," he said.
Some analysts are already predicting that Verizon and AT&T will sharply slow spending in the fourth quarter, especially given uncertainty over whether AT&T's merger with smaller rival T-Mobile will be approved by antitrust authorities.