Another LU-LU

Rumors of Lucent's financial recovery are greatly exaggerated

January 22, 2004

3 Min Read
Another LU-LU

Lucent Technologies Inc. (NYSE: LU) has done it again. And I'm not talking about that stuff you read about in the popular press: "Two consecutive quarters of growth! Net earnings! Blowout quarter!"

Nope, the real interesting items in the Lucent earnings results (see China, Wireless Save Lucent ) came with the stuff under the covers – the nitty-gritty detail that doesn't make headlines, but does give cause for worry:

  • Most of its net earnings – 4 cents per share or $193 million of the $338 million in net profit – came from one-time events such as the sale of the Corning Inc. (NYSE: GLW) stock that Lucent gained when it sold its Optical Fiber division in 2001 (see Street Numbed to Lucent Fiber Talk). The total value of the Corning stock that Lucent sold was $93 million, according to a Lucent spokesperson. Of course, it's possible Lucent will sell more stock in coming quarters, but keep in mind that this is a sale of assets, not an operational profit.

  • Wireless growth in China made Lucent's quarter, with revenue from its mobility division growing 51 percent. This is Lucent's one solid growth story – but it's linked to China. How long will the China Bubble last? Judging by the shrinking revenue Lucent reported for wireline revenue in Asia, it's hard to count on this growth as consistent.

  • Revenue in Integrated Network Services (INS), Lucent's core networking business, shrank by another 8 percent. Meanwhile, international revenues fell 18 percent.

  • The company was cash-flow negative for the quarter. Despite "net earnings," Lucent's cash used by operations was still draining the bank account. This leaves Lucent with $238 million less cash on hand than it had during the quarter before.

  • The negative cash flow of $238 million coincides with payroll liabilities associated with employee bonuses. These costs went up $274 million in the quarter. According to several financial analysts covering Lucent, this cost came from bonuses paid out to Lucent employees in 2003.

    (Regarding the bonuses, a Lucent spokesman says, "This is the first time we've paid significant bonuses in four years.")

  • The company is forecasting little to no revenue growth in 2004.

Now, I'd love to believe in the telecom recovery – and Lucent's recovery as well. But it seems that many folks are pinning their hopes for Lucent's recovery on a telecom rebound in general. The problem with that is that the recovery will shake out the strong from the weak based on where the new growth is. And Lucent is still positioned quite poorly in the market that has the most promise for recovery: data networking.

The most puzzling exemplar of this is the festering wound that is Lucent's installed base of data-networking ATM and Frame Relay switching gear, including the CBX500 and GX550 products.

Lucent owns this installed base, which is significant. However, they've curtailed development of follow-on products in this group and are now depending on a strategy of migrating the users of these switches to Juniper Networks Inc. (Nasdaq: JNPR) routers, as stated yesterday by CEO Pat Russo on the corporate conference call.

In short: Lucent's handing over its installed base to a competitor in the hopes that it can drive some revenue via its reseller and services relationship. In the long term, it will be a mistake. Juniper is cleverly picking Lucent's pocket.

"I'm surprised that Lucent feels so confident about giving their customers away to another company," says Geoff Bennett, chief techologist with Heavy Reading, Light Reading's paid research division.

So far, all this adds up to Lucent working away along the roadmap I outlined in this space nearly two years ago (see Lucent Stands Pat).

So where will Lucent get its magical profits from next quarter? A Bake Sale? Selling routers on E-Bay? The Lottery?

Such concerns are likely contributing to the weakness in Lucent's stock today. Shares were down $0.40 (10%) to 4.02 in midday trading.

— R. Scott Raynovich, US Editor, Light Reading

Disclosure: In keeping with Light Reading's editorial policy, R. Scott Raynovich does not hold a financial position in Lucent or any of its competitors.(See Editorial Disclosure.)

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