Lucent Punched Post Profit

Lucent Technologies Inc. (NYSE: LU) shares fell more than 8 percent in early afternoon trading today, despite the fact that the equipment giant reported its third consecutive quarter of profitability (see Lucent Reports Q2 Results).

Shares of Lucent fell $0.37 (8.55%) to $3.96 on concerns that the company changed its guidance for operating expenses, which it had been slashing in recent years to correspond with slower carrier spending.

Specifically, executives said Lucent would probably spend about $700 million a quarter on operating expenses in the near-term, and that's up from the guidance last quarter of between $650 million and $675 million. Frank D'Amelio, chief financial officer, said the change was because of increased investments in research and development for next-generation networks and increased employee compensation.

Overall, though, Lucent's earnings appeared solid, even if revenues were down from the year-ago period. The company reported a GAAP profit of $68 million, or 2 cents a diluted share, on revenues of $2.19 billion. This compares with the net loss of $351 million, or 14 cents a diluted share, on revenues of $2.40 billion in the year-ago quarter.

The company improved its cash position as well. As of March 31, 2004, Lucent had $4.6 billion in cash and investments, an increase of more than $300 million from the previous quarter.

"While there is always more to do, we are pleased with the progress we're making," says CEO Pat Russo.

The company says it expects yearly revenues to climb in the low single-digit percent for the fiscal year. Lucent reported yearly revenues of $8.47 billion in 2003. Analysts surveyed by Reuters Research expect Lucent to report earnings of 11 cents a share on revenues of $8.85 billion for fiscal 2004.

Lucent's wireless division received accolades during the quarter, though it hauled in less revenue than it did during the year-ago quarter. Many have their eyes on the company's $525 million agreement with Verizon Wireless, as well as the general increase in data services on wireless networks, as a harbinger of future success (see Verizon Outlines 3G Plans).

Besides two key areas -- worldwide services and optical networking -- Lucent underperformed its year-ago results. And, interestingly, it brought in nearly as much from pension credits ($208 million) during the quarter as it did from sales of optical networking gear ($217 million).

Table 1: Lucent's Q2 Revenues by Segment ($ in millions)

	3 Mos. Ended 3/31/2004	3 Mos. Ended 3/31/2003	Year-to-Year Change
Products and Services Revenues
Wireless	$951	$1,095	-15%
Voice networking	$299	$394	-32%
Data and network management	$222	$225	-1%
Optical networking	$217	$160	+26%
Services	$479	$431	+10%
Other	$26	$98	-277%
Total revenues	$2,194	$2,403	-10%
Source: Lucent, SEC filings

Lucent also trimmed its headcount down to 32,500 during the quarter, putting another 500 people on the street (see Lucent Purges China Leaders).

With penalties from a shareholder lawsuit and an SEC investigation still hanging around, the company hasn't quite achieved the appearance of a stability. However, at least one analyst speculates that the increased operating expenses could be a positive in disguise (see Lucent Agrees to $25M SEC Penalty).

"That said, the opex increase… may indicate a greater confidence in revenue growth ahead," writes Legg Mason Inc.'s Timm P. Bechter, in a research note issued today.

— Phil Harvey, News Editor, Light Reading