Wireless

Alcatel's Russo: There is no downturn

May 15, 2008 8:00pm

Is the market for telecom network equipment, like most of the economy, in a downturn‾ Not according to Alcatel-Lucent CEO Patricia Russo.

Sure, the world's largest maker of telecom gear didn't wow Wall Street with its first-quarter report, and there's been plenty of skepticism about the company's performance since Alcatel's merger with Lucent in early 2007. On Apr. 30, Alcatel (ALU) posted a larger-than-expected decline in first-quarter sales (BusinessWeek.com, 4/30/08) and forecast a slight full-year drop in revenue. Yet, the Paris company blamed a weak dollar, which erodes the value of U.S. sales when converted to euros. Excluding currency effects, first-quarter sales would have risen 6.3%. Fact is, Russo says, there are many reasons to view the telecom gear market with optimism, starting with the 'arms race' among wired and wireless service providers to deliver speedier Internet access on the networks.

Russo talked to BusinessWeek.com senior writer Olga Kharif on May 7 about the outlook for the industry and the company.

Is the telecom equipment industry in a downturn‾

No, we are not in a downturn. What we are experiencing now is a market that's a bit uncertain due to the macroeconomic issues we are dealing with. We have the housing issue in the U.S. We have the credit crisis. Oil is at $120 a barrel. Fewer new homes are built, fewer new lines are put in. For smaller [network] operators around the world, it's uncertain whether or not they are going to be able to get all the credit they might like [for capital expenditures]. And that has created a bit of softness.

But we still believe that our market is flat to growing slightly when you factor in the services opportunities that we see. Our market still offers opportunities for growth. What all of us"”we and a couple of competitors"”have said is, 'Look, these are uncertain times. We want to be prudent in how we assess the market.'

What's driving growth in services‾

One, as new technologies get deployed in networks, the complexity increases, and there's a need for help and support around integration that companies like ours are very good at providing. Second, a number of operators are looking at or have already made the decision to outsource the management of their networks as a means to drive greater efficiency and as a way to focus more of their energies on marketing new services. So our business is growing quite nicely. In the first quarter, [revenue from services] grew 14%.

Will you benefit from Sprint Nextel's (S) deal with Clearwire (CLWR), Comcast (CMCSA), and other cable companies to build a new wireless broadband network based on WiMAX technology (BusinessWeek.com, 5/7/08)‾

I would argue any large investment in networks offers an opportunity for us. We have worked with a number of those companies. It also looks like, at least in the short term, there may be some reliance on Sprint's network [to provide mobile Internet services for the consortium partners while the WiMAX network is built]. And, obviously, Sprint is an important customer of ours. You can rest assured we'll be working with them to see what might unfold for us.

Is the fourth-generation cellular technology known as Long-Term Evolution (LTE) a big opportunity‾

If you look at our industry historically, the next technology wave gets talked about for quite a long time before it gets fully commercialized. Take 3G [third-generation cellular technology] as an example. I remember trying to sell 3G in Europe in 1999. And some would say that the real power of 3G"”the data capability"”really hadn't become apparent until 2007. That's a long time. I don't believe that the LTE time frame will be as long, because I think there's a lot of learning from the past. Having said that, I think we are still a number of years away from a massive deployment of LTE. We are still selling 2G technology in many countries.

Is wireless where you expect to see the most growth‾

Most analysts say there will be more growth opportunity in wireline than in wireless infrastructure. Let me tell you why. The wireless technology is the base station and the equipment that receives your call over the air. But once you get to that base station, all the equipment that sits behind that is wireline kind of equipment. And Alcatel-Lucent is the No. 1 player in the world in wireline, hands down. So [we'll benefit] as more broadband penetration occurs, in wireline or wireless.

What's the status with your integration of Lucent into Alcatel since the merger‾

We are now a year and three months into it. We'd laid out a three-year plan when we announced the merger. The integration is on track. The integration of the people, the teams, the objectives"”all of that is done. If you look at what we'd said we'd do last year, we basically delivered against that.

A lot of people have left or were let go in the past year. Is that something investors should worry about‾

No, for the following reasons: First of all, we knew that in any merger you are going to have some fallout on your senior team. You start with two companies, and you literally almost have twice as many people as you need. "&brkbar;I feel good about the management committee that's in place now. They are working well together. I am pleased with where we are.

Do you feel like you still enjoy strong support from the board‾

I absolutely feel the board is behind us. We had a tough 2007. The industry had a tough time. We were not the only one. And going through a tough merger in a tough market made it all the more challenging. Having said that, in the fourth quarter of 2007, we did what we said we were going to do. We demonstrated progress. We were profitable. We grew in the way we said we would. In the first quarter of this year, we did what we said we were going to do. Our focus as a management team is on executing our plan. And we are aligned with the board on that plan.