Alcatel-Lucent (ALU)

Q1 2012 Earnings Call

April 26, 2012 7:00 am ET


Bernardus Johannes Maria Verwaayen - Chief Executive Officer, Director and Member of Management Committee

Paul J. Tufano - Chief Financial Officer, Executive Vice President and Member of Management Committee

Unknown Executive -

Philippe Keryer - Executive Vice President, President of Networks Group, Member of Management Committee and Member of Technology Committee


Kai Korschelt - Deutsche Bank AG, Research Division

Sebastien Sztabowicz - Kepler Capital Markets, Research Division

Achal Sultania

Unknown Analyst

Zahid S. Hussein - Citigroup Inc, Research Division

Eric Beaudet - Natixis S.A., Research Division

Alexander Peterc - Exane BNP Paribas, Research Division

Stuart Jeffrey - Nomura Securities Co. Ltd., Research Division

Anuj Krishan - UBS Investment Bank, Research Division

Sandeep Deshpande - JP Morgan Chase & Co, Research Division

Odon de Laporte - CA Cheuvreux, Research Division


Bernardus Johannes Maria Verwaayen

So good morning, good afternoon, good evening depending on where you are. Thank you for joining us at the Q1 results. If we look to the market, if we look to the fundamentals of the market, nothing has changed. People still build out networks. People are making plans for fiber networks around the world. Governments are looking to building a digital infrastructure. And still, Q1 from a CapEx position from customers around the world, was not a very strong quarter, and we had a slow start. So maybe it's good that we talk about those 2 issues when we talk about the numbers.

Before that, let's look to this famous chart. People worked very hard to make it happen, so please take a look, and let's see where Alcatel-Lucent plays in this environment that I just described. Because basically, if you look to the number of smartphones or tablets sold in the U.S., AT&T announced that 60% of all of their -- all the end-user equipment is now smartphone or tablet. And in Verizon, it is, I believe, almost 50%. And people are working on the assumption to build out, a need to build out.

At the same time, of course, in certain markets like in China, we saw a massive calendarization issue around some of our biggest programs around GSM, where they decided that the central bids would not be in Q1, but in Q2. And therefore you see that, for example, on that particular issue, we had a 90% drop in our revenue in GSM in China.

So calendarization, cautiousness, if you look to Europe, clearly, where companies have to choose CapEx on one side and the demands for CapEx and dividends on the other side, uncertainty of the climate and simply, CapEx against promises made by those companies. If you look for the global picture, the CapEx for 2012, as relevant to us, is approximately the same as that for 2011. So that's for the picture in total.

And how had we done? Well, it depends how you look to it. If you look from an operations point of view, we have discussed many times the need for us to get better discipline and a better control on cost and cash. On both issues, I think we have performed very well. If you look to the cash part, for example, on working capital, we've done a pretty good job, and it is not a onetime. It's a more solidified repeatable capability that we're building in the organization.

If you look to operating working capital, it generated EUR 255 million in this quarter. And I'm pretty sure that Paul will say a few more words about it. But also if you look to the other lines where we seldom talk about, like tax and interest and pensions, we did EUR 37 million better. So the ability for the organization to look to the cash as a managerial item, where you need to have the systems and the capabilities, much better.

On costs, same story. We talked about costs for many, many times. We gave you targets. We have taken over the last 3 years, as we discussed at the end of Q4, EUR 1 billion out of our costs. There's much more work we need to do. And we gave you an ambitious plan for 2012, and we are on track to deliver that plan, EUR 100 million this quarter.

And the important thing is that there was a lot of question marks around, "Are you able to attack your SG&A base?" In this quarter, out of the EUR 100 million, 77% is about reduction on SG&A. So I think we're making very good progress in changing the way our cost structure is there, and that will help.

But if you do a good job on the costs, you do a good job on the cash, and you have a backdrop of low volumes and you have a backdrop, maybe even as imported off an unfavorable mix, it pays negatively into your margin. And we're at the trough of the margin. So why the margin? We come back to it later. Why the margin is so low, the explanation, but leave the explanation aside. From where we are at the 30.3% in the quarter, with the cost savings that we have, you have to say, "Okay, what is now happening in the markets? Is this a onetime or is this a fundamental change that you see in your mix?" And we don't think it's fundamental at all. So that's important to note, and we come back to the explanation of why it was in this particular quarter, the 30.3%.

But if you look to, as Frank always talks about, surprises, I don't think it is a surprise. But it is -- if you look to trends, your negative trends, positive trends and you'll have neutral ones. The neutral one, this maybe a surprise. It's CDMA. CDMA in Q1 equals that of Q4. So you may look to the numbers in the fourth and say, "It's a CDMA problem." Year-over-year it is, but if you look quarter-over-quarter, it is not. So the negatives is in GSM where we didn't foresee that the Chinese would decide what they have decided.

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