Alcatel CEO Verwaayen’s Credibility Tested by Losses

By Matthew Campbell
May 7 (Bloomberg) -- Ben Verwaayen took over as Alcatel- Lucent SA Chief Executive Officer in 2008 with a promise to turn the unprofitable telecommunications equipment maker around. Now, his credibility is being tested.
The Paris-based company yesterday posted a first-quarter loss that was more than double what analysts had estimated, bringing the total deficit since Alcatel-Lucent’s creation in 2006 to 9.78 billion euros ($12.4 billion). Verwaayen was optimistic about the company’s outlook, saying the second quarter would be stronger and reiterating targets for 2010 margins. Some analysts remain skeptical.
“The problem is, the level of trust in those sorts of comments is going down,” said Pierre Ferragu, an analyst at Sanford Bernstein in London.
The 58-year-old former CEO of BT Group Plc blamed the larger-than-estimated loss on component shortages, and said the dearth of parts is an indication of rising demand in the global economy. That failed to bolster Alcatel shares, which tumbled 6.5 percent yesterday and fell another 6.3 percent today to 1.98 euros.
Since Verwaayen was appointed in September 2008, Alcatel shares have lost more than half their value, eroding market value by 5.03 billion euros. In the same period, Swedish rival Ericsson AB’s shares have risen about 3.8 percent.
‘Normal Company’
Alcatel’s first-quarter loss of 515 million euros -- more than double the average of estimates from analysts of 244.4 million euros -- means the company has lost money in every quarter except two since 2006, when Alcatel SA bought Lucent Technologies. Verwaayen maintains that the company remains on course for his three-year turnaround plan.
The “aspiration to be at the end of 2011 a normal company is absolutely still there,” he said yesterday.
During Verwaayen’s time as head of BT, profit almost doubled, going from 995 million pounds ($1.49 billion) in 2002, the year he took over, to 1.74 billion pounds in 2008.
He cut about 5,000 jobs a year at London-based BT to counter falling sales from land-line voice calls and increased competition in broadband services.
The challenges he faces at Alcatel are very different.
Different Challenge
“He came into a situation with a very low bar to cross,” said Jason Willey, an analyst at Standard & Poor’s Equity Research in London. Still, “I’m not sure there was that much belief he was going to get exactly where he said in that timeframe.”
The French company and its European rivals Ericsson and Nokia Siemens Networks are confronting the rapid emergence of competition from Chinese companies including Huawei Technologies Co. and ZTE Corp.
Ericsson, the world’s largest wireless equipment supplier, on April 23 posted a 27 percent drop in first-quarter profit. Like Alcatel, the company said it had difficulties sourcing basic parts such as semiconductors. Nokia Siemens Networks reported an operating loss of 226 million euros, reversing a profit in the previous quarter.
Profit in 2009 at closely held Huawei, China’s biggest maker of phone equipment, more than doubled to 18.3 billion yuan ($2.7 billion), the company said in March. ZTE first-quarter profit rose 40 percent to 109.9 million yuan.
Competitive Landscape
The Chinese companies have made the competitive landscape tougher, Willey said.
“Huawei and ZTE have the ability to operate and compete in a different manner,” he said. “For the European players, it’s even more competitive than it was.”
Huawei has been aggressive in winning business from some of the world’s biggest mobile operators, including China Unicom, Telstra Corp, and Vodafone Group Plc. The Shenzhen, China-based manufacturer is also targeting a “breakthrough” in the U.S., Western Europe vice-president Tim Watkins said last year.
Competition in the equipment industry claimed a notable casualty in 2009 when Mississauga, Canada-based Nortel Networks Corp. filed for bankruptcy protection after reduced spending by telecom operators and price competition.
European suppliers including Alcatel, Ericsson, and Nokia Siemens Networks must continue to invest in innovation while also cutting costs in order to keep ahead of emerging-market competitors, said Patrik Karrberg, a researcher in the London School of Economics’ Information Systems and Innovation Group.
Boost Investment
For emerging-market companies, “it’s easy to catch up because you can copy your way to a certain point,” he said. However, “there will be a point where they will have caught up and then have to invest in R&D.”
Verwaayen is betting that surging demand for data-hungry devices like Apple Inc.’s iPhone will drive investments in the higher-end network infrastructure the Paris-based company provides.
It has scored some notable successes. It’s supplying so- called fourth generation wireless technology to AT&T Inc. and Verizon Communications Inc., the two largest U.S. mobile operators, and rebuilding emergency-service communication networks for the German government.
Alcatel may benefit more than other European equipment suppliers from the U.S. network upgrades because of its presence in North America through Lucent, said Mirko Maier, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart.
Uphill Task
Still, after yesterday’s results, the company faces an uphill struggle to meet its stated target of reaching an adjusted operating margin between 1 percent and 5 percent this year, he said.
Some investors are not willing to wait.
“I thought the company would get its act together,” said Ulf Moritzen, who helps manage about 1 billion euros at Hamburg- based Aramea Asset Management, which sold its Alcatel shares late last year. “Alcatel lost a little of the pace. We decided to focus more on companies with a clearer outlook for growth.”