ALU pulls back from cliff, but challenges ahead

Alcatel-Lucent's CEO Ben Verwaayen has been on a rollercoaster since taking over the troubled manufacturer, but the most recent quarter offered hopes that he had stabilized the ship and was poised to deliver the turnaround he had promised, more or less on schedule. Despite that, a generally hostile market remains critical, and only last week, Sanford Bernstein cut its rating on the firm despite admitting the threat of a bankruptcy filing had now passed. Verwaayen hit back at such sentiment, saying this week that ALU was no longer "on a financial precipice" and was now focusing on innovation and growth.

Verwaayen, entering his fourth year at ALU's storm buffeted helm, told Bloomberg: "We were a company on a cliff. We don't want to be a company on a cliff." He admitted there were still challenges to meet - although the French company posted a profit last year for the first time since it was formed in 2006, its CEO missed one key target, on the cash position. He insisted that would be improved by the end of 2012, but last month, ALU reported negative free cashflow of €458m ($606m) for 2011. The CEO waived his 2012 stock bonus for missing the target.

He added in the interview that ALU would look to boost profit margins and eliminate $660.9m in costs this year and cut 1,800 jobs in Europe. "For our shareholders, we need to have a return," he said, indicating that his goal was to achieve a 10% operating profit margin. "To dance with the best in the class, it has to be around 10%," he said.

However, Sanford Bernstein's Pierre Ferragu cut his rating on ALU from outperform to market perform, arguing that the operating profit target looks "challenging", and expecting the firm to achieve only about 4%.

One reason for that gloominess is rising competition from agile Chinese vendors. Most of the focus has been on Huawei's rapid rise in wireless and converged infrastructure, but its smaller rival ZTE is also biting at ALU's heels. According to analysis by Frost & Sullivan, ZTE achieved the highest revenue growth rate among major telecoms equipment vendors in the first three quarters of 2011, compared to the same period in 2010, and could overtake ALU. It grew sales by 33.4% to $9.17bn in the nine-month period, largely driven by emerging market strength, massively outperforming average sector growth around 10%. Even Huawei only managed 14%, while Ericsson rose by 10%, Nokia Siemens by 8% and Cisco by 6%.

Frost & Sullivan said that ZTE's fast growth in 2011 was attributable to its aggressive marketing and sales in China and emerging economies, where it has gained deals with more tier one players (outside the US).

ZTE's VP of wireless products, Xu Ming, said the firm had set a target of being a top three network infrastructure player within three years, which would mean overtaking ALU, Cisco and Nokia Siemens. It aims to use its footprint in emerging economies in Africa and Asia to win 4G contracts, he said in an interview. The firm currently lies in sixth place in this segment with 7.2% share, just behind NSN on 8.4%.

"ZTE's technology is pretty solid and very innovative but to move past Alcatel-Lucent and others they would have to build their service business," commented Gartner analyst Bettina Tratz-Ryan, speaking to Bloomberg. "Especially in new network roll-outs around 4G, operators tend to evaluate their suppliers by their ability to help in design and implementation."