Lucent Snoozefest

It's profitable, but it's still in survival mode

July 19, 2005

4 Min Read
Lucent Snoozefest

Perhaps it's appropriate that one of Lucent Technologies Inc.'s (NYSE: LU) most prominent issues is its pension funding, since the company these days has all the liveliness of a Florida retirement home.

This morning, Lucent released its latest numbers, which were about as exciting as watching grandpa hack away on the golf course in Fort Lauderdale. Tiger Woods, this is not. Profits: slightly up, year over year (though much came from those always mystical "one-time events"). Sequential revenue growth: flat. Guidance: growth of "mid-single digits." Zzzzzzzzzzzzz... (See Lucent Ups Revenue, Profit Falls.)

But let's talk about the big picture: Is Lucent making a comeback? Well, yes, Lucent has returned to profitability. But it's still not really growing. Seems to me as if every time a new quarter comes around, the executives just find new ways to push the food around the plate, jiggling expenses, pension credits, and cutting more employees to eke out a respectable profit number.

Meanwhile, the old-school Lucent execs and their pals continue to rake in hefty salaries while the company continues to shrink its rank-and file workforce. This is not a company that is in any kind of dynamic "expansion mode," looking for new opportunities and adding new employees. And, after all, it's companies that are expanding their employee bases that generate excitement, which is now once again the case at other more lively competitors such as Juniper Networks Inc. (Nasdaq: JNPR) and Cisco Systems Inc. (Nasdaq: CSCO). The big question is this: It's 2005, the telecom recovery has treated many folks well – if you're still cutting costs and employees, isn't there something seriously wrong?

In short, Lucent is still in survival mode. Its profitabilty improves only when it cuts costs. Proof of this mindset came on today's conference call, when some analysts chose to focus on the cost-cutting benefits of Lucent combining its wireless and wireline operations and how that might improve profitability.

Today may have been a turning point in the next stage of Lucent's recovery plan. Executives today said you'll have to wait for the real growth stories in 2006 or 2007 (see Lucent Beats Estimates, Bets on IMS). That's a big red flag. For the first time, even Lucent's biggest cheerleaders appeared to be unsatisfied and impatient with the responses from Lucent's management. Just after the release of Lucent's numbers, the stock was up. After the conference call with management, the stock was down 4 percent. Not exactly a ringing endorsement of the leadership.

Speaking of leadership, what markets does Lucent lead anymore? It's certainly not a leader in packet-switching, where it's relying increasingly on its partnership with Juniper. It's lost the FTTP and DSL game to Alcatel (NYSE: ALA; Paris: CGEP:PA). In optical, it's an also-ran, and it's cut back most next-generation product development. Legacy circuit switching is dead, and Lucent has let its data-switching products wither on the vine. You might argue that Lucent is winning the wireless CDMA battle, but is that enough to support the whole company? About the best thing you can say about Lucent these days is that it hasn't botched things up as badly as {dirlink 2|63} has.

I've maintained all along that the core problem at Lucent is its culture, still linked genetically to its bureaucratic {dirlink 5|11}origins (see Another LU-LU and Lucent Stands Pat). Lucent does not appear to be interested in core cultural change – only penny pinching, deck shuffling, and political gamemanship at the top of the executive ranks. What would consititute a core cultural change? I say the biggest sign would be the company becoming an interesting, exciting, and "hot" place to work again. I can't remember the last time I heard somebody in the industry say, "Boy, I really want to work at Lucent." The more the executives pay themselves and fire people, the less they excite the workforce.

Until that changes, the company won't change, and it will continue to get beat by more nimble, fleet-footed, technology-focused companies with enthusiastic workforces – companies like Cisco and Juniper.

I don't know what to say to the core set of optimists out there who think Lucent is a great comeback story, the next IBM, a good "value" investment. To me, it's got worse odds than a coin toss. If you want to invest in telecom techology, why not invest with leaders, rather than legacy players? As an investment, Lucent could be one of history's biggest value traps. Successful technology investing has never been about value – it's always about growth, because trends and technology change so fast it's the folks that are nimble enough to grab the next big thing that win.

Remember DEC, Wang, and Stratus Computer? As someone raised in the technology belt of Massachusetts in the 1980s, I remember these companies well. They led markets they grew up in, but when the markets changed, they could not change fast enough. And Lucent reminds me of them. Lucent may very well be the next DEC, the corporate technology dinosaur that could not change.

— R. Scott Raynovich, US Editor, Light Reading

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