Lucent Clarifies Product Strategy

Lucent Technologies Inc. (NYSE: LU) has picked the product and service offerings it hopes will help it navigate the telecom downturn and bring the company back to profitability next year.

After presenting what she called "pretty ugly" fourth-quarter earnings to Wall Street analysts this morning (see Lucent Reports Q4), CEO Patricia Russo reiterated a plan announced earlier this month to focus Lucent spending on "near and clear" market opportunities (see Lucent to Cut Headcount, Products).

The product lineup, like Lucent's pro forma loss of 64 cents a share on revenues of $2.28 billion, didn't hold many surprises. Here's the breakdown:

What Stays

  • Metro and edge optical networking equipment: "We will retain optical networking," Russo said today. Specifically, she mentioned the Metropolis optical line, which she claimed is in 45 trials with various carriers worldwide and has been picked for deployment by Verizon Communications Inc. (NYSE: VZ). On the transport side, also staying are the LambdaUnite high-end switch and LambdaXtreme DWDM core transport box, which Russo said also have good prospects (see Lucent's LambdaUnite Busts Out and Stratos to Purchase Paracer).

  • Circuit switches: Russo said customers are evolving their 5ESS voice switches to packet-based networking. The company's IP Centrex Solution, which combines the SpringTide 7000 IP Service Switch with an iMerge Centrex Feature Gateway, will be kept. She cited SBC Communications Inc. (NYSE: SBC) as a key customer. Russo also said a "large-capacity switch" and a "new high-density optical interface unit" are in trials right now.

  • Core ATM/MPLS migration gear: Lucent's GX 550, CBX 500, and PacketStar (PSAX) core ATM/IP/frame relay gear are all keepers, and Russo says they'll be enhanced with MPLS migration capabilities as customers demand.

  • Net management software: Lucent's Navis series of management packages are bestsellers, Russo said, and investment will not just continue, but will be increased in this area. She claims that more than 900 service providers and enterprises have the software installed in one form or another.

  • Mobility equipment: Lucent's confident of the long-term prospects for its line of wireless CDMA gear and intends to leverage its leadership in that market (Russo claims 70,000 base stations to date) to stake a claim in UMTS too. Russo also said Lucent studies point to business demand for high-volume mobile data access (e.g., file transfer for attachments).

  • Services: Even with the near-term market challenge, Lucent customers are spending billions of dollars on services, either to outsiders or inside support staff, Russo said. Lucent plans to keep its hand in what it sees as a $44 billion annual market opportunity, expanding offerings in network integration, multivendor network management, and outsourcing of network operations. Over 90 percent of the contracts awarded to Lucent in 2002 have "a service component," she said, and "we intend this as a basis for our strategy shift."

What's Shelved

  • Some softswitches: Lucent's softswitches, Russo maintains, are platforms on top of which various applications run. Some of these applications are more successful than others. There's still solid demand for softswitched voice over IP and Internet call diversion, for instance. And wireless networks also are a key target. But customers show no intention of replacing their Class 4 and 5 voice gear with softswitches. As a result, no funds will go toward that particular application.

  • DSL access: Lucent's Stinger line of DSL access concentrators aren't going away, but new developments will be made only on a "customer-by-customer basis."

What about the stuff Russo didn't mention, such as the WaveStar crossconect line? A Lucent spokesperson said WaveStar is alive and well, along with other products that weren't cited. Not being mentioned, in other words, may not mean something's out of the picture.

Russo's list prompted many questions from analysts. One wanted to know how Lucent could be cutting 20 to 25 percent in its services business as part of its goal to axe over 10,000 more employees by March 2003, while placing so much confidence in its future potential. While acknowledging that service volumes have dropped, Russo and CFO Frank D'Amelio replied that the company still expects to see revenues increase in that segment.

The reliance on mobility also raised questions. "From our viewpoint, we don't believe Lucent's factored in the substantial risk in the mobility market over the next 12 to 18 months," says Steve Kamman of CIBC World Markets. Kamman, who does not hold stock in Lucent -- although CIBC has done investment banking for the company -- says the chance Lucent's taking in mobility raises questions about other elements of its strategy, such as its emphasis on services.

Interestingly, Lucent maintained today that it expects revenues in the present first fiscal quarter to be down about 10 percent, to roughly $2.05 billion, although next quarter should see an improvement to about $2.5 billion. Lucent execs stressed that the change isn't any reflection on what it sees happening marketwise, but instead has to do with bottom-line improvements and with information it's getting from specific customers.

"Our comments for the quarter are not meant to be comments on the market," Russo said. "2003 will be down."

At press time, Lucent shares were trading at $0.73, up $0.01 (1.39%).

— Mary Jander, Senior Editor, Light Reading
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lickmeyster 12/4/2012 | 9:29:24 PM
re: Lucent Clarifies Product Strategy I am not necessarily talking about marketing, but executives accurately assessing whether a business has a near term potential to be cash flow positive. Lucent doesn't have two years to turn things around. It is going to be very difficult to cut 10,000 people and not cut any businesses. Some of the businesses they are in, must be bad investments given their overall financial results.
futureisbright 12/4/2012 | 9:29:23 PM
re: Lucent Clarifies Product Strategy Looks like LU has decided to shave across the board rather than cut off the rocks around its neck.

I am confident that wireless CDMA does continue to be a bright spot for the present and the future, but their GSM and UMTS need to be deep sixed. In GSM, they have minimal market share, and NO traction in the only growth market left, the US. In UMTS, they have no hope to ever achieve a market share that would allow them to approach breakeven.

What then is the point of keeping these businesses? For GSM, LUGÇÖs one major customer (30% of the installed base) is T mobile, whose parent Deutsche Telekom is also a major optical customer. It appears that LU will compound losses in wireless and optical to avoid annoying their money losing customer.

For UMTS, they have no market credibility left. Should they end up deploying equipment, the volumes will not be there to sustain the revenue levels necessary for breakeven. When analysts are writing off Alcatel, Motorola, and Nortel, two of which have greater contract announced share, it is hard to imagine Lucent coming back from, literally nowhere.

Then perhaps, when all is said and done, these businesses have effectively been written off; Pat just has not announced it yet.

For their wireline business, clearly the 5E and related items are cash cows worth milking. The installed, in North America in particular is compelling. It may be time though to cut off some of the less profitable applications and markets (e.g: the European version, or the GSM/UMTS version). Maybe thatGÇÖs what Pat is doing.

Network management clearly continues to remain a strength, and a competitive weapon, especially in the home market.

Optical continues to be nice and sexy technology and to bleed red, like the rest of the optical industry. Will LU have the stomach to keep it until the rest of its portfolio returns to the black? ItGÇÖs an even call that Pat is just postponing the pain of cutting it off

In all, a conservative plan, based on what was announced. Not a turnaround plan.
hiddentiger 12/4/2012 | 9:29:22 PM
re: Lucent Clarifies Product Strategy This announcement does little in the way of telling us how much future R&D money will be spent on any of these product catagories. For all practical purposes- they could be keeping any number of these product catagories alive, just for cash cow purposes.
optiplayer 12/4/2012 | 9:29:22 PM
re: Lucent Clarifies Product Strategy Nice summary futureisbright. This is more of the same for LU.

Particularly amazing was that they again set the performance expectations high for 2 quarters out. Yes, the next Q will be down but then revenue if going to jump ~25% sequentially in the Q after that (from $2B to $2.5B). Gimme a break. They have just set themselves up for failure again. This projection was met with significant doubt by the analysts but it shows that LU management still hasn't learned from their mistakes.

Of course it could be that they had to throw the $2.5B number out there because a realistic projection would lead folks to conclude that they will exit 2003 with far less than the $2B in cash they are projecting which would further call into question their ability to survive....
hrdhtr 12/4/2012 | 9:29:06 PM
re: Lucent Clarifies Product Strategy It's the end of the line for the 6.4Tbps IP Core Router turned 160Gbps Multi-service switch that never passed a packet on a live network.
It certainly led a storied existence here at LR.
seeallwan 12/4/2012 | 9:29:06 PM
re: Lucent Clarifies Product Strategy re: It certainly led a storied existence here at LR

It never made it as a router, what made anyone think changing labels would turn it into a switch?

160Gbps Multi-service switch my arse. 16 single OC48 ATM slots add up to (16 x 2.5 = 40) a 40Gbps switch. Glad LU canceled the MSC25000 (OZ) switch, then cap all the Cascade products and invest in TMX880 with no real network management.

Add the SpringTide products to the mix and you have more of the same ZERO dollars.

PSAX in general is holding it's own, but with it's centralized architecture, lack of scalability and lack of network management, it's only a matter of time for this as well.

So, the red headed step child in Westford MA (CBX/GX) continues to be deployed, despite Lucents relentless efforts to kill it.

IMHO approx. 18-24 mos of constant cancellations, lack of vision, novice development in IIDC and arrogant politics in Indian Hill will make things very very difficult to further develop MPLS, POS or GigE on the CBX/GX products.

Any bets on Westford being closed down in 2003? The products may still be around, but hedging my bets on IIDC and IH taking all the work?

In light of Election season, my vote would be to have all LU execs held accountable, be forced to exit there positions and exit the Data space as well. They may have Bell Labs, but they don't know Data, period!!!
Belzebutt 12/4/2012 | 9:29:05 PM
re: Lucent Clarifies Product Strategy TMX, is that the NX64000?
seeallwan 12/4/2012 | 9:29:04 PM
re: Lucent Clarifies Product Strategy re: TMX, is that the NX64000?

Yes it is...failed router, now failed switch.
broadbandboy 12/4/2012 | 9:29:04 PM
re: Lucent Clarifies Product Strategy Did anybody wonder about the apparent contradiction in these two statements?

"Circuit switches: Russo said customers are evolving their 5ESS voice switches to packet-based networking."


"But customers show no intention of replacing their Class 4 and 5 voice gear with softswitches. As a result, no funds will go toward that particular application."


Hmmmm. Customers are "evolving" the 5Es towards packet switching, but have no interest in softswitches? Or maybe she means they have no interest in Lucent softswitches?


Belzebutt 12/4/2012 | 9:29:03 PM
re: Lucent Clarifies Product Strategy Are there any other kind of switches that do voice to packet?

Nortel softswitches seem to be doing quite well...
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