Optical/IP Networks

Lucent Leans on Wireless

Lucent Technologies Inc.'s (NYSE: LU) fiscal second-quarter earnings saw a significant boost from the strengh of its wireless business, compared to a continued decline on the wireline side.

That's driven the company to restructure -- again -- around its wireless business (see Lucent Converges, Jobs to Go). But the big question is: Can the networking vendor continue its winning wireless streak into 2006?

For the quarter ended ended March 31, Lucent reported revenue of $2.34 billion, flat sequentially and up 6 percent from the same quarter a year ago. The firm's net income was $282 million, or 6 cents a share, compared with $68 million, or 2 cents a share, in the the same period last year.

Lucent's mobility business contributed $1.2 billion to the top line for the second quarter, up 4 percent sequentially and 24 percent compared to last year. In contrast, the wireline business produced $589 million in revenue, a sequential decline of 9 percent.

In short, Lucent needs its wireless business more than ever if it is to continue posting a profit.

On the earnings call, Lucent executives were confident about the company's ongoing unwired propects. "We continue to see subscribers growing; we continue to see new markets opening up," Lucent CEO, Pat Russo said on the call.

The firm has deals to roll out major CDMA EV-DO (evolution, data only) 3G network upgrades for both Sprint Wireless (NYSE: PCS) and Verizon Wireless (see Sprint Confirms EV-DO Network and Lucent Scores $5B Verizon Deal). The Sprint upgrade is due to be fully rolled out by the end of 2005, while Lucent's $5 billion contract with Verizon will see the companies look beyond current 3G networks.

Russo also stressed Lucent's relationship with Cingular Wireless LLC for its planned 3G UMTS (Universal Mobile Telecommunications System) rollout.

But some investors may remain skittish about the prospects of Lucent's long-term recovery until some more contracts come into the pipeline. After all, big contacts are nice when you get them, but they tend to peter out over time.

Citigroup analyst Alex Henderson issued a note this afternoon questioning the company's ability to maintain this kind of growth next year, especially in the international arena.

"We maintain concerns here for the longer term, into 2006, as a strong 2005 will likely prove to be a tough act to follow." writes Henderson.

"Lucent will need to make some meaningful wins on the UMTS front internationally in order to show meaningful 2006 growth. We do not believe this is likely."

Then there's the question of mergers. In the U.S., mega-mergers have driven the industry to consolidation plays. Further conslidation could be coming.

Not all analysts seemed worried. Some said the reorganization around wireless is a good move, and that profitability is sustainable. "More and more Lucent is looking like a wireless and services company; a sustainably profitable wireless and services company," writes Lehman Brothers analyst Steve Levy in a research note.

Russo didn't offer much on this issue of consolidation. "We have not yet seen any impact as a result of consolidation," she told listeners during the Q&A session.

— Dan Jones, Site Editor, Unstrung

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