Optical/IP Networks

Lucent Plays Waiting Game in Q2

Lucent Technologies Inc. (NYSE: LU) has had an international incident.

The soon-to-be-acquired company's earnings for its second quarter of fiscal 2006, ended March 31, revealed a 28 percent drop in sales to customers outside the U.S. because of sales troubles in China and India. (See Alcatel, Lucent Seal Deal and Lucent Turns Q2 Profit.)

One specific lowlight was the company's Personal Handyphone System (PHS) business, which has slipped in anticipation of the issuance of 3G licenses in China. The PHS is a portable, cordless phone that offers a low-cost alternative to cellular phones. But that business is set to dry up when 3G services take hold. And, unfortunately for Lucent, 3G licenses in China still haven't been issued, so it's watching one phone equipment market shrivel while waiting for the new market to kick in.

The company says it expects a $500 million revenue decline in China and India because of the aforementioned problems -- and the fact that India's a highly competitive sub-continent with razor thin profit margins.

Lucent reported net income of $181 million, or 4 cents per diluted share, on revenues of $2.14 billion for its fiscal second quarter. This compares to a net income of $267 million, or 6 cents per diluted share, on revenues of $2.34 billion in the year-ago quarter.

Analysts expected Lucent to earn 3 cents a share on revenues of 2.24 billion for the quarter, according to Thomson Financial . So Lucent hit the earnings number and missed the revenue projection.

While the comparison to last year looks bad on its face, Lucent did note that the year-ago quarter was boosted by about $119 million in net income, or about 2 cents per diluted share, because of "tax items and certain other significant items." Those one-time items were nowhere to be seen this quarter.

"Our revenues increased modestly on a sequential basis, resulting from a measured pace of growth in some of the markets in which we participate, particularly in North America where we have seen slower-than-anticipated wireless deployments," said Lucent CEO Pat Russo in a prepared statement.

"Half way through the fiscal year our year-to-date revenues are clearly not where we would want them to be, nor where we anticipated at the start of the year," Russo proclaimed on the conference call. Russo did note that Lucent's bets in IPTV deployments, 3G opportunities, and other technology areas are all "directionally correct." The thing that's hard to predict, with carriers consolidating and deployments slowing in some sectors, is when the sales volume will match Lucent's enthusiasm for some of these newer technologies.

Shares of Lucent fell $0.04 (1.35%) to $2.93 in midday trading on Tuesday as investors digested yet another conference call where Lucent lowered the bar for itself.

Lucent's CFO John Kritzmacher said on the call that revenues for the second half of Lucent's fiscal year would be higher than they were during the first half of the year. But annual revenues will be down year-over-year.

The company recorded $9.44 billion in revenues during its previous fiscal year, and analysts yesterday were anticipating that it would only hit about $9.41 billion for fiscal 2006. (See Lucent Loses in Q1 as Expected.)

Of course, the company wouldn’t be more specific. Now that it's merging with Alcatel it says it is discontinuing its practice of providing specific annual guidance. [Ed. note: Oh well, that's one less thing we'll have to laugh at.]

Mobile infrastructure continues to be a bright spot for Lucent, as the company's mobility-related revenues jumped 6 percent quarter-to-quarter and accounted for 47 percent of its overall revenues. Prudential analyst Inder Singh notes this morning that the real benefits of greater wireless adoption worldwide won't materialize before fiscal 2007, so there may be yet another so-so quarter in the cards before things improve.

The company ended the quarter with $3.9 billion in cash and investments, down from $4.38 billion three months ago.

— Phil Harvey, News Editor, Light Reading

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