Alcatel boss yearns for his rivals' margins

Reuters News
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Posted: Feb 21, 2012 4:08 PM
Alcatel boss yearns for his rivals' margins

By Leila Abboud and Gwénaëlle Barzic

PARIS (Reuters) - Despite giving up his stock options for missing some of last year's targets, Alcatel Chief Executive Ben Verwaayen still believes the telecoms equipment maker will one day match rivals three or four times more profitable.

It's a tough ask for the Franco-American company, which posted its first annual profit last year since it was formed in an ill-fated 2006 merger.

Verwaayen said in an interview on Tuesday he had no illusions about the difficulty of the task, having not delivered on all the targets laid out three years ago in his turnaround plan.

"You are seeing some of our colleagues in the industry achieving double-digit returns," he told Reuters.

"By definition, therefore, that is the art of the possible ... Between where we are today and those numbers, there is a road that we have to travel in the coming years."

Verwaayen declined to say quite how long the road would be, nor to be pinned down on concrete profit targets along the way for 2012.

Most recent figures suggest much of the journey could be uphill. Alcatel-Lucent posted operating margins of 4 percent at the end of 2011, while Sweden's Ericsson managed a margin for underlying earnings excluding joint ventures of 11.6 percent, and China's Huawei hit 15.8 percent in 2010, the last year for which figures are available.

His task is complicated by a volatile economic outlook that market forecasters say will lead some big telecom operators to cut network investments this year.

With such headwinds, Verwaayen has pledged only to improve the group's operating margins this year, which is far from the 5-9 percent margin goal set at the outset of the turnaround plan.

"What is possible today, given the economic and competitive developments in the industry, is slightly different than what was possible pre-crisis in 2009," he said.

Verwaayen told the Alcatel-Lucent board only last week that he would turn down the stock options in his pay package for 2011.

"I felt I did not deliver," he said. "It felt like it was the right thing to do, given that I am asking our staff to cope with a wage freeze this year and that the share price got a hit this year."

"We met almost all our goals last year," he said. "We are going to do our utmost to make sure that by the end of 2012, we have done so."

MAKING PROGRESS

The Dutch-born CEO, who formerly headed BT Group, has made considerable progress during his tenure at Alcatel-Lucent.

The company, which struggled to compete with Ericsson in the so-called third-generation technology that runs most mobile phone networks, has made inroads with the introduction of the successor fourth-generation gear. The new products have garnered major contracts with U.S. giants AT&T and Verizon as well as about 20 other major operators.

Verwaayen has also stripped out 1 billion euros ($1.33 billion) in costs to lower the revenue point at which the group can break even. He has sold off non-core assets such as the Gensys call-centre business for $1.5 billion and signed a patent licensing deal expected to generate substantial new revenue.

Alcatel-Lucent started off 2011 strongly, riding a wave of spending by U.S. operators and leading many investors to believe that Verwaayen had helped the group turn a corner.

The optimism fuelled a nearly 100 percent increase in the share price from January to May, only to see it more than wiped out by a 75 percent drop in the following seven months.

Investors began to worry that the company was spending too much cash on building up equipment stocks and keeping the business running, while at the same time seeing a big lag in payments from customers. This perennial problem of cash burn has plagued Alcatel-Lucent since its merger.

Investor euphoria about the good results in the first half flipped into despair in the third and fourth quarter.

"The stock reaction was massive on both ends," Verwaayen said. "I think that's the demonstration that the market is still jittery about us."

For Verwaayen, the company was never in any danger from a liquidity standpoint, but he recognizes that some people following the company's fortunes had such concerns.

"In order to get away from that, the most important thing is to have a balance sheet with a strong enough cash position that the liquidity question is no longer relevant even for the most cynical person," he said.

"That's where we need to get to. And, actually, we are going to be more robust in 2012 on cash."

Shares in Alcatel-Lucent are up 60 percent since the beginning of the year, closing at 1.93 euros on Tuesday.

But the company's current market capitalization of roughly 4.5 billion euros ($6 billion) is a far cry from its pre-merger valuation of roughly $36 billion.

To revisit those highs, Verwaayen might have to master more than just the art of the possible.

(Editing by Chris Wickham and Will Waterman)