Telecom equipment gear maker Alcatel-Lucent scaled back its profitability goal for the year, saying operators were cutting spending on their networks in reaction to macroeconomic uncertainty, especially in Europe.
The Franco-American company said it is now aiming for an adjusted operating margin of around 4 percent, down from its prior goal of above 5 percent.
Alcatel-Lucent shares opened sharply lower after the statement on Friday, falling 10 percent, making it the biggest loser on the French blue-chip index.
The more cautious tone echoed the message sent by rivals Juniper Networks, market leader Ericsson, and Nokia Siemens Networks, who have warned that the gloomier global economic outlook would likely make telecom operators thriftier ahead.
To cope, Alcatel-Lucent Chief Executive Ben Verwaayen promised a renewed cost-cutting program aimed at generating additional savings in 2012 of 200 million euros ($275 million) in fixed costs and 300 million in variable costs.
Given economic uncertainties, we will take more radical actions, he said. You will see us increase our efforts on cost control and cash flow.
In the third quarter, Alcatel-Lucent saw its revenue slip 6.8 percent to 3.8 billion euros, with lighter sales across its major markets of North America, Europe and Asia.
But profits held up, helped by high-margin sales in the United States and cost controls, giving the group adjusted operating income of 173 million euros with 4.6 percent margins.
The results were a bit weaker than analysts' average expectations of third-quarter sales of 3.99 billion euros and earnings before interest and tax (EBIT) of 158.5 million, according to Thomson Reuters I/B/E/S.
Alcatel-Lucent has had a mixed year as Verwaayen is in the home stretch of a three-year turnaround plan to repair the company after a value-destroying merger in 2006.
The company rode a wave of spending by U.S. operators on their mobile networks in the first quarter, sending its shares on a huge run-up through summer that abruptly ended after weak second-quarter results.
Analysts and investors have since worried that Verwaayen's fragile turnaround would be derailed by a weakening macroeconomic outlook.
Much will depend on what happens in the United States where Alcatel-Lucent generates one-third of its revenues from major customers like AT&T and Verizon.
Alcatel-Lucent's margins are also largely driven by the U.S. because the market is effectively closed to low-cost Chinese competitors like Huawei and ZTE Corp over concerns about the security of key national infrastructure.
Asked whether U.S. operators would also slow spending in the end of the year, Verwaayen demurred.
We are strong in the U.S. and will remain so, he said.
But some analysts are already predicting that Verizon and AT&T will sharply slow spending in the fourth quarter, especially given uncertainty around whether AT&T's merger with smaller rival T-Mobile will be approved by antitrust authorities.
As for the outlook for next year, Verwaayen said it was far too early to know how it would shape up.
The market is uncertain, and it's not just because of the economic crisis, he said. There are also unknowns about how Europe will regulate fiber broadband buildouts, and other regulatory uncertainties elsewhere.
Analysts from RBS, Societe Generale and Nomura have predicted that the market for telecom equipment will shrink 0-5 percent next year.
Alcatel-Lucent's shares are down 8 percent this year despite going on a huge run in the first six months as investors bet that Verwaayen would make good on its long-awaited turn around. The share price peaked at 4.40 euro and has since fallen back to less than 2 euro.
Rival Ericsson's shares are also down 6 percent this year.
($1 = 0.728 Euros)
(Editing by James Regan and Hans-Juergen Peters)