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New ALU chief may intensify cost cutting after Q1

Operating losses narrow and US sales are strong, but cashflow and sustained profit remain challenging


Published: 29 April, 2013

READ MORE: Financial | France | Alcatel-Lucent | Infrastructure

Alcatel-Lucent narrowed its first quarter operating losses but the cashflow challenges which afflicted its previous CEO still haunt new chief Michel Combes.

The French giant slid back into a net loss in the quarter, with a deficit of €353m ($460m) compared to a year-ago profit of €398m, the result of selling the call center business Genesys. However, although figures missed analyst estimates, ALU did reduce its operating loss by 32% year-on-year to €202m, on revenues up just 0.6% to €3.23bn. The former figure included restructuring charges of €122m and a financial loss of €152m.

Revenue growth was driven entirely by a 15% uptick in US revenues, thanks to major deals (shared with Ericsson) with AT&T, Verizon and Sprint. North America is now the largest geographical market for ALU, at 48% of sales. Its heartland region, Europe, saw sales fall by 10% year-on-year to €771m.

Gross margin was 29.4% of revenue for the quarter, compared to 30.2% in the year-ago quarter and 30.4% in the fourth quarter of 2012. The vendor said the decline in margin reflected the current "unfavorable product mix", a factor also cited recently by Ericsson.

Combes, a former senior executive at Vodafone, has perhaps taken on a poison chalice, though he will be hoping he can quickly build on all the progress made by his predecessor Ben Verwaayen, whose ambitious vision and aggressive cost cutting did return ALU to profit, but not in a sufficiently sustainable way to reassure investors.

The deepening eurozone crisis derailed some of his plans and cashflow remained a serious challenge. That situation is scarcely improving yet. ALU reported a free cashflow loss of €533m in the quarter, worse than the Q112 figure of €162m. Combes' statement said cash generation "remains a challenge".

Amid problems including cashflow and slower than expected uptake of ambitious new 4G products, Verwaayen resigned last fall, to be replaced by Combes on April 1. While Verwaayen had a reputation for grand thinking at previous, successful postings such as heading up BT, Combes is regarded as a ruthless cost cutter, based on his track record. He will unveil an updated turnaround plan in early summer, which is expected to increase the current targets of slashing 5,000 jobs and €1.25bn a year in costs, and lead to more business sell-offs.

"We are actively reviewing the group's businesses and operating model to design the conditions for value creation in the future," Combes said in a statement.

The company has provided no guidance for 2013 as yet this year. Combes tried to be optimistic, saying: "Alcatel-Lucent's first quarter results reflect both encouraging trends in the marketplace and good progress with The Performance Program, for which discipline on execution remains the priority in 2013. Free cashflow remains a challenge. Strong focus will be placed on working capital management to reverse some of the negative impact incurred this quarter."

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