Alcatel-Lucent's Combes unveils make-over for struggling vendor

Alcatel-Lucent CEO Michel Combes unveiled his much-anticipated restructuring plan for the equipment manufacturer Wednesday, announcing further cost-cutting measures in a drive to become cash-flow positive by 2015. He also touted a new slimmed-down organisational structure that will see the company focus on three main segments in order to become a specialist in IP networking and ultra high-speed broadband.

alcatel lucent CEO Michel Combes


Combes, who announced he would carry out a strategic company review after Alcatel-Lucent posted a loss of €353 million in the first quarter of 2013 and continued to burn through cash at an alarming rate, said the new plan is comprehensive and deliverable, and is based in clear industrial, operational and financial choices.

"Are we talking today about a plan much like the others? The answer is no. Definitely not," said Combes during a media briefing to present the new three-year plan, which the company is calling the "Shift Plan."

Combes is the third CEO to try and place Alcatel-Lucent on a more even footing. The company has been unable to post regular profits and generate cash since it was formed in a merger in 2006, and several attempts have been made to cut costs and return the company to profitabilit. The company had already been implementing a plan to slash more than 5,000 jobs and expenses by €1.25 billion a year, and said €122 million of the first-quarter loss was linked to these measures.

Now, the new key financial goals by 2015 are to reduce fixed costs by €1 billion ($1.34 billion), cut another €1 billion in costs mainly through unspecified asset sales, reduce debt from the current level of €5.6 billion by €2 billion and redefine a further €2 billion of debt that is close to maturity.

Combes was unable to provide details of exactly which assets are might be sold, and said he would be talking to unions first before making any announcements on job cuts.

Alcatel-Lucent's was given a cautious welcome by analysts, while shares jumped by as much as 7 per cent to a new high for the year, according to Reuters.

"This plan goes in the right direction, but I believe some elements of it are not aggressive enough," Pierre Ferragu, analyst at Bernstein Research, told Reuters. Ferragu thought the cost savings could have gone further in view of the tough competitive landscape.

The financial goals will be achieved through a fundamental restructuring and differentiated management of the company. Under Combes' plan, Alcatel-Lucent will move away from being a telecommunications equipment "generalist" and towards becoming a more focused and slimmed-down company with three main segments: core networking, which will be managed for growth with defined revenue targets; access, including both fixed and wireless access with a focus on LTE and small cells; and "other", such as enterprise solutions. Access and the "other" unit will be managed for cash with no defined revenue targets.

"We will refocus our R&D to support these fixed choices," said Combes, who added that the plan will be self-funding. "This company will once again take its destiny into its own hands."

The target for the new core networking segment will be to achieve more than €7 billion in revenue by 2015, with a 12.5 per cent operating margin, compared to sales of €6.1 billion and an operating margin of 2.4 per cent in 2012. Combes said access, on the other hand, is a flat market, and will therefore be managed only for cash, with a target of €250 million in operating cash flow for the "access and other segment" by 2015.

Combes admitted that the company had been slow to respond to changes in the market and has missed various opportunities to introduce products, while being present in too many markets. "I could blame the world for our difficulties," he said, referring to competitive and regulatory pressures. "But the truth is that…it's in our hands."

The access segment will place a strong focus on LTE and small cells, and Combes believes the vendor already has a strong position in both of these areas. Alcatel-Lucent will reduce R&D spend on legacy 2G and 3G equipment by 50 per cent and place the focus firmly on TDD and FDD LTE overlay networks and the rollout of metro cells and femto cells. Combes added that the vendor is continuing to address 15 unprofitable contracts, and will address the last five this year.

In terms of the opportunity for LTE deployments in Europe, Combes noted that the region has focused on single RAN to date. However, he believes "this has to change" "and said Europe will become more like the United States, where Alcatel-Lucent has a 50 per cent share of the LTE market. "Overlay is a better solution," he added.

Combes described the situation on the North America wireless market as a "virtuous circle" of investment and innovation, with U.S. operators making the investment that enables vendors to innovate and content providers to develop and sell services.

"In Europe, we are facing the 'vicious circle,'" he added. He said operators are not investing enough to allow vendors and content providers to innovate. However, Combes, himself a former manager at Vodafone, said he believes this situation will change as operators "reignite" their investment plans.

Combes has also put a new management team in place to implement the new plan in the coming two years, although he noted that CFO Paul Tufano will step down once the new plan is underway. A search is underway for a successor. Philippe Guillemot, who previously worked at Cie Financiere Michelin and Valeo, has been appointed as head of operations to help with the restructuring, Bloomberg noted.

For more:
- see this release
- see this Reuters article
- see this Bloomberg article

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