Lucent Toes the Line

Quarterly financials are in line with lower-end guidance, and execs say focus is still on 2003 profitability

January 22, 2003

5 Min Read
Lucent Toes the Line

Is there light at the end of this tunnel? Lucent Technologies Inc. (NYSE: LU) this morning reported earnings that were in line with expectations and issued more hints about its reinvention as a large-scale reseller and services vendor.

Lucent officials said the company will continue to push for partnerships, particularly in IP core networking, in an effort to gain profitability by the end of this year, despite a continued bleak outlook for the overall market.

In its first-quarter earnings report this morning, Lucent reported revenues of $2.08 billion, down 9 percent from last quarter's results and down 42 percent from the same quarter last year (see Lucent Loss Narrows in Q1). The dip corresponded with the low end of Lucent's previous guidance, which called for sales to be flat to down 10 percent.

At the same time, thanks to various steps Lucent's taken to reduce costs and liabilities, the company reported a net loss of only 11 cents per share, an 87 percent decrease in net loss since last quarter. Further, execs say they're hoping for a 20 percent increase in revenue next quarter, with corresponding bottom-line improvements.

The company still hopes to close 2003 profitably, with gross margins in the 35 percent range and a breakeven level of $2.5 billion in revenues. Lucent's also hopeful that revenues from services and new products, including optical ones, will help increase sales to about $2.5 billion for each of the remaining quarters of 2003.

"We are very clear on what we need to do, and very focused on getting it done," said CEO Patricia Russo on a conference call with analysts this morning.

High on the "to do" list is continued, increased emphasis on "end-to-end solutions" -- in other words, services along with products. To help the trend along, Lucent plans to bulk up its services capabilities through partnerships in key areas of carrier demand, such as the one announced yesterday with Cisco Systems Inc. (Nasdaq: CSCO) for mobile accounts (see Lucent & Cisco: Together at Last).

Lucent also is thinking of seeking a partner to address the IP core, Russo said: "In the IP core, we will look to partner and will evaluate [alternatives]." In the area of multiservice edge switching, though, the company's still evaluating whether to partner or go it alone.

At least one observer thinks yesterday's announcement with Cisco, along with speculation that Lucent will take a partner such as Juniper Networks Inc. (Nasdaq: JNPR) for IP core routing, are among the most significant moves Lucent's made recently.

"Lucent's crossed the Rubicon," says Steve Kamman of CIBC World Markets. By refocusing on areas it does best and partnering with successful players in certain areas, Lucent could improve its prospects.

The question remains, though, whether any strategy will allow Lucent to significantly improve sales in a market that's still in the trough. Lucent's revenues have dropped dramatically in all market segments (see below), and Russo and CFO sidekick Frank D'Amelio clearly stated today they're not "forecasting an improvement in the overall market."

27236.gifIn fact, Lucent anticipates (without stating an actual expectation yet) that total revenues for 2003 could be 20 percent lower than 2002, following the trend of what Russo calls a market that "remains challenging and uncertain." This quarter alone, revenues from U.S. sales were down 10 percent, while international ones declined about 7 percent -- due to capex reductions by carrier customers worldwide.

So just how does Lucent plan to reach its goals, given the current macroeconomic doldrums? Execs had several answers:

  • Ongoing layoffs: Lucent plans to keep shrinking expenses in a range of ways, including the layoff of another 5,000 employees by March 31, 2003. This past quarter, 7,000 were eliminated, bringing the census to about 40,000. By the end of the year, the company wants to have just 35,000.

  • Wireless sales: Lucent will see growth over the next quarter across all businesses, D'Amelio said, but particularly in mobility, where the company sees upticks in Asia, China, and North America -- in that order. Growth will come from a combination of new business and already-pledged contracts. Russo added that wireless installations worldwide are apt to grow at a larger rate than wireline ones, since wireless nets aren't constrained by the capacity overbuild that wireline networks have suffered.

  • Services: As noted, Lucent's counting on services as a key to future revenues. Of 20 new contracts Lucent gained this quarter, eight are services-intensive, execs said today. What's more, partnerships are expected to help the segment grow beyond the limitations of Lucent's product line -- eventually, anyway.

  • New products: Lucent's still got a lot of confidence in optical networking, particularly in the metro space. Russo says customers materialized this quarter in China, Eastern Europe, and Indonesia.

  • Debt, equity, and cash transactions: Lucent has taken a number of steps to adjust its balance-sheet positions, including buying back more than $1 billion in convertible securities. This past quarter, for instance, the firm exchanged $392 million worth of preferred stock and securities for 214 million shares of common stock. Possibly to help fuel future buy-backs, the company issued a shelf registration with the Securities and Exchange Commission (SEC) today, paving the way to create more shares that could be used to buy back even more convertibles.

The jury's out on whether all this will work. As rival telecom supplier Alcatel SA (NYSE: ALA; Paris: CGEP:PA) did last week, Lucent warns that the overall market is unlikely to match any internal progress it manages to make (see Alcatel Offers Tempered Optimism). Instead, the company seems bent on honing its structure to match the overall economy, in a bid for survival. In doing so, it's banking on particular areas, such as partnerships and wireless, for which the future's cloudy.

Nonetheless, investors seemed buoyed by Lucent's call this morning. At press time, shares were trading at $1.75, up $0.07 (4.17%).

— Mary Jander, Senior Editor, Light Reading

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