Optical/IP Networks

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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opticalweenie 12/5/2012 | 2:37:18 AM
re: Another LU-LU I vote they have a bake sale so that they
can peddle all the hash brownies that senior
management has obviously been making and eating
in large batches.
flam 12/5/2012 | 2:36:53 AM
re: Another LU-LU methinks another enron is brewing ...
CoolLightGeek 12/5/2012 | 2:35:23 AM
re: Another LU-LU I must of hit a nerve on yesterday's posting.
Why was it removed?
All it did was call attention to the fact that LR financial interest is tied to their advertisers: Many of whom are Lucent competitors.
I think it is appropriate that your readers be informed of the breakdown of revenue you receive from Lucent versus its competitors and then let your reader make there own judgement on its potential influence on your objectivity.

Would you please inform me the message board rule that was broken that caused the first message to be deleted?
truelight 12/5/2012 | 2:35:13 AM
re: Another LU-LU someone offended some weenie at Lucent and they called LR who then removed it. If you Go to Yahoo and post there. They unlike LR do not remove the posts.
Hybrid 12/5/2012 | 2:35:13 AM
re: Another LU-LU Conspiracy theories fascinate me. What's your response Scott?
I want full disclosure, especially given the fact that your article is promtping me to sell off 100% of my Lucent stock this afternoon, and I'm probably not alone.
CoolLightGeek 12/5/2012 | 2:34:17 AM
re: Another LU-LU truelight,
Do you have insider information on LR posting removal or are you just guessing?
Someone who posts 75 times in 2 weeks must have an interesting day job.

The opportunity to comment on articles in LR is compelling. I view getting my first posting removed as an accomplishment. I'm guessing it was too embarrassing to LR or Scott: and I guess that violates the code of conduct on the board.
Sometimes a secret but relevant truth can be embarrassing.
Clearly, there are potentially very good reason and obligations why LR would not want to, or cannot, disclose their financial records relating to advertising from industry vendors.
But one only needs to look at the scroll bars and LR events to make their own judgements of how true "no financial position" in "Lucent or any of its competitors" is.
If LR could claim it got most of its revenue from non-vendor subscriptions, it would have an easier time claiming independence from vendor influence.
It used to be that most technical news reporting was supported by individual subscriptions: Over the last 20 years that has changed.
I honestly think technical journalists and editorial writers (including Scott) try to stay objective. But to claim that they do not have a financial relationship with the vendors, is disingenuous.
Scott Raynovich 12/5/2012 | 2:33:35 AM
re: Another LU-LU we deleted your post because it was annoying...

Advertising! Stop the presses! We have to make money!
Scott Raynovich 12/5/2012 | 2:33:34 AM
re: Another LU-LU I was wondering if we could get back to a productive discussion such as dicussing the the future of Lucent.
Scott Raynovich 12/5/2012 | 2:33:34 AM
re: Another LU-LU As US Editor I try to respect business/edit line in the sand generally don't monitor the details of advertising. Though I will say, it's certainly not a secret (nor a conspiracy) ... all you have to do is look around the site and see who's advertising. I mean, that's what they're paying for.

It doesn't pay to favor advertisers because over time they will lose respect if you pander to them.
truelight 12/5/2012 | 2:33:33 AM
re: Another LU-LU
Guessing of course. I did not read your original post but please post again so I can comment on.

I don't agree on technical journalist being 'balanced' in thier views. With so many 'smart' people and things going on in the industry many claims are made. It is tough for them to keep up and as a result they end up repeating what the last intervee said or perhaps advertised.

BTW: Actually I'm retired (59);-) Working on 100 posts in two weeks to get to "major blow hard trumpet". It beats working in Publix bagging groceries with my peers. I'm also working on my own competitor to "light reading" and a possible book deal.


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