On top of that, it is also facing tough challenges in the market due to stiff competition. Alcatel Lucent SA (NYSE:ALU) is facing a tough time competing with Ericsson (NASDAQ:ERIC) and Cisco Systems, Inc. (NASDAQ:CSCO) . The telecommunication equipment war is focused on quality and price. To stay competitive in the price war, companies must have a low-cost structure. Alcatel already has a major issue on this aspect, particularly compared to low-cost Chinese competitors.
While Alcatel Lucent SA (NYSE:ALU) has a global footprint, majority of its revenue, about 72%, comes from the European and the U.S. markets. Unfortunately, it is facing tough times in Europe, significantly affecting its overall revenue growth.
Its best bet now lies in the U.S. market. The company has to strengthen its stronghold in the U.S. At the same time, it needs to improve its market share in Europe and South America.
A major highlight of Alcatel’s financials is the sharp decline in net income. It posted a staggering drop, from $1.49 billion in net income in 2011 to a net loss of $1.91 billion. That’s more than a $3 billion decline in earnings within a year.
For the first quarter, Alcatel Lucent SA (NYSE:ALU) beat estimates. But the cash flow remains weak. In fact, the company has never posted positive free cash flow since the merger of Alcatel and Lucent in 2006. At present, the cash cycle of Alcatel Lucent SA (NYSE:ALU) is 59 days. This is quite high, leading to growing concerns on the relatively poor liquidity ratios of the company.
Alcatel Lucent SA (NYSE:ALU) also faces a near-term debt concern of close to $3 billion, which is due within three years. Total liabilities amount to $24.62 billion. Therefore, the company needs to trim down its expenses in order to shore up enough cash flow. This is crucial for the refinancing and roll-over of its debts.
The huge debt exposure forced the company to contemplate on laying down its last cards. Alcatel Lucent SA (NYSE:ALU) is now eyeing on using its patents as collateral to raise a billion dollars at least. The value of its patent portfolio could be as high as $9 billion. Alternately, Alcatel-Lucent plans to use its routing business as collateral, in lieu of the patents.
Putting all these valuable assets on the table as collateral is a relatively risky bet. But, it seems this is the last resort to fuel a major breakthrough. However, it may also be a good strategy for a complete turnaround. But, the success heavily relies on the company’s cash management. With a new CEO in place, there are high hopes for Alcatel Lucent SA (NYSE:ALU) to survive the financial turbulence.
Alcatel is not the only company that is suffering from intense competition in the industry. Both Ericsson (NASDAQ:ERIC) and Cisco Systems, Inc. (NASDAQ:CSCO) also experienced low prices. Due to the financial crisis, most companies opted for low-cost manufacturers, which slashed the market shares of brand names such as Alcatel Lucent SA (NYSE:ALU), Ericsson and Cisco. As a result, the investors in these companies have faced substantial capital losses in the last five years.
Nevertheless, Ericsson (NASDAQ:ERIC) and Cisco Systems, Inc. (NASDAQ:CSCO) are in much better financial condition than Alcatel Lucent SA (NYSE:ALU). They have negligible debt issues compared to the French giant. In fact, Cisco’s third-quarter earnings report was very much appreciated by the market. The company experienced substantial growth in emerging markets and boosted its dividend by 20%.
Ericsson (NASDAQ:ERIC) recently made a bold move to acquire Microsoft’s Mediaroom business. For a company that is known as a global telecommunications service provider, this acquisition was a step outside the box. The acquisition of Mediaroom will put Ericsson into the IPTV business, which is growing pretty fast. It can also provide a safety cushion against declining prices in the networking & communication industry.
It seems that Alcatel Lucent SA (NYSE:ALU) needs a miracle to make a complete turnaround. As a matter of fact, the board is doing something about the generally weak financials by installing a new CEO, Michael Combes. He used to be the head of Vodafone Group Plc (ADR) (NASDAQ:VOD)‘s European operations. He took over the top management position in April. He is expected to announce the company’s turnaround strategy plan by June.
With his experience in the European market, he is expected to improve the market share of Alcatel in Europe. Michael Combes is a veteran in the telecom industry. He also has a reputation of being an excellent cost-cutter. He is just what the company needs at this point amid year-over-year negative free cash flow and rising debt. However, cost-cutting is just one piece of the puzzle. There are other tough challenges that must be dealt with such as the declining market share.
No one can tell what his plans are. But one thing for sure, Alcatel Lucent SA (NYSE:ALU) shares are going to face another major shakeup. When Combes reveals his turnaround strategy for Alcatel-Lucent, shares can react either uphill or downhill. Until then, trading on Alcatel-Lucent remains driven by speculations.
The article This Telecom Giant Faces Tough Challenges Ahead originally appeared on Fool.com.
Nur is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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