China, Wireless Save Lucent

Thanks to growth in its mobility division, specifically its CDMA wireless networking business in China, Lucent Technologies Inc. (NYSE: LU) continues its battle back to profitability in the first fiscal quarter of 2004, as the company announced improved profits and revenues from the prior quarter (see Lucent's Back in Black).

Lucent logged net earnings of $338 million, or 7 cents per share. After subtracting 4 cents in one-time gains, the company had earnings of 3 cents per share, beating expectations of breakeven results, according to Reuters Research. The company logged $2.26 billion in revenue, up 11 percent from the fourth fiscal quarter of 2003.

Much of the earnings came from special gains, including the sale of securities. In the company's conference call, Lucent CFO Frank D'Amelio said these gains included the sale of shares of Corning Inc. (NYSE: GLW) that Lucent received when it sold its optical fiber business. Corning shares have doubled in the last month.

The bulk of Lucent's growth was in Chinese markets, especially in wireless networks, according to Lucent executives. Chairman and CEO Pat Russo said the growth came from building CDMA networks in China and new contracts with China Unicom Ltd.

Revenues in Lucent’s Mobility division increased 51 percent in the first quarter, totaling $960 million.

But what China giveth, China taketh away. D'Amelio said that wireline business declined overall because of a slowdown in international network buildouts, especially in China.

In the U.S. and data networking markets, growth was mostly flat. Lucent’s Integrated Network Solutions (INS) division had revenues of $790 million, down 8 percent compared to the prior quarter. There was an 18 percent decrease in non-U.S. revenues, and U.S. revenues increased 3 percent.

Russo cited an improved business climate but was conservative in her outlook for the future.

“The market clearly is stabilizing. While we are cautious, we remain encouraged,” she said. "While we have yet to see the evidence of overall capex budgets being raised, we are seeing investment.”

Lucent did not provide financial guidance for the second quarter of 2004, but the company expects to be profitable for the full year 2004, with revenues remaining "flat."

Russo cited the mobile data, metro optical, and VOIP markets as showing potential of growth for the company.

“We see VOIP as a major long-term opportunity. The migration process has begun. VOIP solutions are varied right now, as we work with our customers."

In responding to questions about Lucent's relationship with Juniper Networks Inc. (Nasdaq: JNPR) , Russo described the partnership as "comprehensive" and extending beyond a reseller agreement: "Our relationship with Juniper is far more than an OEM relationship. It involves us evolving our customer networks into MPLS."

Lucent's deal with Juniper was key in winning some large Chinese service providers this quarter (see China Deals Brighten Lucent's Day).

Lehman Brothers analyst Steve Levy called the quarter “very positive,” in a research note published this morning. He notes, though, that he is concerned about the company’s negative operating cash flow.

Levy did not change his rating on Lucent shares. Lehman rates Lucent an Overweight, it’s highest rating, and gives the stock a price target of $4.50.

Shares of Lucent were down $0.21 (4.42%) to $4.54 in midmorning trading on Wednesday.

— R. Scott Raynovich, US Editor, Light Reading