Telecom Lead Europe: Alcatel-Lucent’s first quarter
results indicate that operators in the company’s core markets are reining in
their 3G and 2G spend. The ramp up of LTE spending will continue throughout
2012 for all vendors.

Revenues from the 4G technology have yet to make up for
declines in CDMA and GSM, causing Alcatel-Lucent’s Wireless sales to decline
29.5 percent to $433 million, year-to-year in 1Q12. The decrease in CDMA sales
can be mainly attributed to North America, where Verizon cut back its business
with Alcatel-Lucent by over 12 percent year-to-year.

The company, and industry as a whole, is experiencing
significant pullback in 2G GSM spend, especially in China. GSM revenue is now
mainly derived from maintenance and coverage buildouts in rural areas, as most
operators deploying new networks are going directly to 3G or 4G. Alcatel-Lucent’s
Chinese revenue fell 21.4 percent year-to-year, which the company attributed to
the swift drawdown of GSM spending by the country’s mobile operators.

Alcatel-Lucent’s bottom line benefitted from the sale of the
Genesys business, but operating margin fell to its lowest level post-merger.

The company’s healthy net margin of 12.4 percent was masked
by the gain realized from the sale of its Genesys unit. Operating margin,
however, fell to -9.0 the worst since the merger of Alcatel and Lucent
Technologies, as the company’s cost cutting efforts were unable to keep pace of
the drop in revenues. Had the restructuring initiative announced last quarter
not started in 1Q12, operating margins would have contracted further. The
cost-cutting program, in which Alcatel-Lucent will reduce fixed costs by $260
million and variable costs by $390 million in 2012, saved the company $131
million in fixed costs during 1Q12. The majority of the cuts were likely
employee-related, which helped drive down SG&A costs by 10.6 percent
year-to-year.

Alcatel-Lucent is focused on developing its lightRadio
portfolio, which is being co-created by some of the world’s leading operators.

The Alcatel-Lucent and China Mobile lightRadio co-creation
agreement, which was signed in January 2012 but announced in February 2012,
outlines the specific areas of product development the two companies will focus
on. Co-creation project areas include cube-based radio, baseband unit pooling,
and defining the radio architecture. Personnel from Alcatel-Lucent’s Bell Labs
and China Mobile’s R&D unit began work in January. Both companies will
benefit from the collaboration, as China Mobile will influence the design of
the product, which it will likely deploy as part of its forthcoming TD-LTE
network buildout. Alcatel-Lucent, meanwhile, gains valuable input from the
world’s leading operator by subscribers. Products stemming from this agreement
will be commercially available in 2H12.

Clearly, Alcatel-Lucent cannot co-create with every
lightRadio customer, and therefore selected Verizon Wireless, China Mobile, and
Telefonica to ensure the solution gains influence and is tailored to specific
requirements in key markets. Telefonica, which is using Alcatel-Lucent’s
lightRadio solution as part of its LTE pilot program in Spain, has yet to
commercially deploy LTE in the United Kingdom, Spain, Brazil, and Argentina.
The operator has not chosen a small cell vendor yet either, though it is
looking at offerings from NSN, Samsung, Ericsson, and Huawei, as well as
Alcatel-Lucent. Telefonica’s status as a co-creation partner elevates
Alcatel-Lucent in the running for a small cell supply contract.