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No one said Ben Verwaayen's job would be easy. But the difficulties facing the new chief executive of Alcatel-Lucent (ALU) were underscored on Oct. 30 when the French-American telecommunications-equipment maker reported quarterly results below analysts' already low expectations. Operating profits fell 43% year-on-year, to $51 million, as revenues from its core business, sales to fixed-line and mobile-phone carriers, slumped 13%, to $3.5 billion.

In an interview with BusinessWeek, Verwaayen promised to deliver a plan by early December to streamline the company's operations and product portfolio, while sharpening its focus on lucrative new businesses such as services. He also hinted at a shakeup in top management, which has changed little since Verwaayen, the former boss of British telco BT Group (BT.L), took over from former CEO Patricia Russo six weeks ago (BusinessWeek.com, 9/2/08). 'We have truckloads of things to do but great opportunities in front of us,' he says.

Despite what Verwaayen agrees are 'unsatisfactory' profits, the Dutch-born CEO noted that Alcatel-Lucent is generating positive cash flow from operations, some $134 million during the quarter. And he said the company is sticking with its earlier guidance for 2008, which calls for operating margins in the low to mid-single digits and revenues flat to slightly down vs. 2007. Investors seem reassured: Alcatel-Lucent shares soared 22% in early trading on Oct. 30, though they're still down some 80% since the company was created by a transatlantic merger two years ago.

Behind its rivals

Alcatel-Lucent's results also continued to lag those of its closest rivals. Sweden's Ericsson (ERIC) beat analyst estimates when it reported third-quarter revenues on Oct. 20 of $6.36 billion, up 13%, though its net income fell 28%, to $384 million. Nokia Siemens Networks, a joint venture of Nokia (NOK) and Siemens (SI), reported third-quarter revenues down 5%, to $4.38 billion, on Oct. 16, with a small operating loss of $1.26 million.

Verwaayen, who won plaudits for his stewardship of BT, is already signaling he'll be a stringent cost-cutter. He's selling off Alcatel-Lucent's fleet of corporate jets. And rather than hiring consultants to diagnose the company's woes, he has invited customers and employees to e-mail him with criticisms and suggestions. 'Engaging in direct dialogue is a better way than bringing a consultancy in. You hear it from the horse's mouth,' he says.

Verwaayen says he sees opportunities for 'massive cost savings' by eliminating duplication in operations and in the merged company's product portfolio. But he downplays the possibility of major job cuts, beyond the 16,500 positions"”nearly 20% of its workforce"”already set for elimination under an earlier restructuring plan. 'Everybody immediately jumps to job cuts,' he says. 'I think it is the wrong focus to start from.'

Big changes could be coming to the executive suite, though. So far, Verwaayen has brought in only one new top manager: Robert Vrij, the former head of telecom software group Openwave (OPWV), who was named this week to head Alcatel-Lucent's North American operations. But stay tuned for more newcomers. 'We will make adjustments to our teams,' Verwaayen says. 'You will see more coming on board.'

Emphasizing services

To boost growth, Verwaayen promises to put more emphasis on smaller but faster-growing parts of Alcatel-Lucent's business, such as its services division, where revenues grew a healthy 12.1% during the quarter. He wants to help telecom operators develop new offerings they can market to customers"”everything from music downloading to Internet search capabilities.

Carriers are eager to offer such services themselves, rather than ceding potential revenues to outsiders such as Apple (AAPL) and Google (GOOG).

Other telecom-gear vendors are likely to move in the same direction, but Verwaayen has put Alcatel-Lucent at the front of the pack by presenting 'a strategy vision of turning itself into a service company,' says Bettina Tratz-Ryan, a Frankfurt-based telecom analyst with consultancy Gartner Group (IT). 'In the short term it is risky, but it is the right thing to do.'

Indeed, Verwaayen's challenge is formidable. Alcatel-Lucent has been bleeding red ink for more than a year as it struggled to integrate two starkly different companies (BusinessWeek, 6/18/08) and took more than $1 billion in writedowns on U.S. activities it absorbed from Lucent Technologies in the 2006 merger.

'Brave' look forward

The Paris-based company has lost market share in mobile communications in the face of brutal price competition from Ericsson and China's Huawei Technologies. And it has been clobbered by global economic turmoil, as longtime customers such as Verizon (VZ) have delayed investing in new equipment. 'The number of new subscribers in the mature markets in broadband is slowing down,' Verwaayen says, and the credit crunch only makes things worse.

Can Verwaayen deliver a turnaround after so many months of misery‾ Richard Windsor, a London-based analyst with Nomura Securities, says the CEO's decision to stick with his earlier guidance on revenues and profits is 'brave, given the macroeconomic outlook.' Despite Verwaayen's reassuring words, additional job cuts are almost unavoidable, Windsor says. But, he adds, 'One has to be hopeful. Ben Verwaayen's track record is infinitely superior' to that of his predecessor, Russo.

Matlack is BusinessWeek's Paris bureau chief. Schenker is a BusinessWeek correspondent in Paris.

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