Will Alcatel-Lucent exit from Middle East as it earns 7 percent revenue there

Telecom Lead Middle East: Alcatel-Lucent launched The
Performance Program, which will reduce the company’s cost structure and improve
margins by the end of 2013.

Alcatel-Lucent launched The Performance Program in 1Q12
in response to steadily falling margins and revenues. TBR believes
Alcatel-Lucent is taking necessary action to right poor financial performance
and remain viable in the long-term. The restructuring initiative is similar to
Nokia Siemens’ plan in that it involves layoffs, exiting certain geographies,
and the evaluation of unprofitable services contracts, but is less ambitious on
the whole. To bring employee costs in line with revenues, Alcatel-Lucent will
embark on a large-scale cost-cutting initiative that will involve 5,000 layoffs – an  estimated 6.7 percent of the workforce – with the majority most
likely stemming from its European operations, where personnel is expensive due
to higher salaries and pension obligations. In contrast, NSN will eliminate at
least 17,000 positions.

Alcatel-Lucent-s plan to exit certain regions comes at a
time when Huawei and ZTE are increasingly dominant in Middle Eastern and
African (MEA) markets. Although the company did not announce which specific
regions it would be exiting, TBR believes markets in the MEA region are the
strongest candidates, as the Chinese vendors are able to undercut Alcatel-Lucent’s
pricing. Alcatel-Lucent earns only 7 percent of revenue from MEA.

Restructuring or terminating existing unprofitable
managed services contracts will result in additional headcount reductions as
well as hone the company’s focus on higher-value services, where Alcatel-Lucent
can attempt to carve out a larger position for itself against Ericsson and NSN,
which are entrenched in the market. In low-end, commoditized services such as
field maintenance, Huawei is making considerable inroads with operators,
including in Europe, where it won an operations and maintenance contract with
Switzerland’s Sunrise Telecom.

Following the sale of its Genesys contact center business
in 1Q12, Alcatel-Lucent’s lines of business fit more closely together and are
able to produce synergies, such as leveraging cloud development for use in the
Enterprise business, or leveraging expertise in IP and optical technologies to
win deals in wireless. Because its businesses have the potential to achieve
greater integration, the company will be reluctant to raise cash and cut costs
through the sale of business units.

Alcatel-Lucent will not achieve its full-year 2012
operating profit target following a disappointing 1H12

Alcatel-Lucent had expected to grow its adjusted
operating margin in 2012 to above the 3.9 percent mark it achieved in 2011, but
the company will not be able to offset negative revenue growth of 12.3 percent
year-to-year in 1Q12 and 7.1 percent year-to-year in 2Q12 with cost reductions.
While Alcatel-Lucent laid blame on the difficult economy, the company’s
underlying cost structure and deteriorating legacy businesses remain at the
core of the problem.

With the launch of The Performance Program,
Alcatel-Lucent aims to reduce costs by an additional €750 million, following on
the heels of its plan to eliminate €500 million in fixed and variable expenses,
which will be completed by the end of 2013. In addition to reducing costs,
Alcatel-Lucent will grow revenue by leveraging its stable of innovative
products that are now coming to market. Small cells will become an integral
part of operator networks in 2H12 and 2013, as showcased by Telefonica’s
selection of Alcatel-Lucent femtocells for deployment in South America and
Europe. Additionally, the vendor’s 400G optical solution, which will not be
available until 4Q12, is seeing strong advance demand. In total, the company’s
High Leverage Network products make up over 50 percent of Networks revenues.

Michael Soper, Networking & Mobility Research
[email protected]