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Optical/IP

Lucent Supernova

Photo of R. Scott Raynovich Could Lucent Technologies (NYSE: LU) be in greater disarray?

Lucent's past few months should go down in history as one of the most cataclysmic breakdowns in global business management. The company reported its third earnings warning of the year on Tuesday night, and the stock fell more than 30 percent on Wednesday as a result.

Lucent, once considered a bellwether technology growth stock, is off its rocker, and the management's bumbling assessment of the situation leads you to wonder what they've been doing for the past year. Lucent investors can start counting the days until CEO Rich McGinn (see the "Has-been Bin" of The Top Ten Movers and Shakers in Optical Networking) is fired.

Exemplifying the company's complacent attitude toward the situation, Deborah Hopkins, Lucent's chief financial officer, actually told the audience during a Tuesday night conference call that she was "sitting on a pile of gold."

Lucent investors must be wondering if it's the Acapulco variety. They have seen their pile of gold turned to dust and blown into the wind. At the beginning of the year, Lucent was trading at $72, and now it's flirting with teens. Investors holding the stock at the beginning of the year have lost more than 70 percent of their money.

What happened? Well, it's a long story that's been well documented here in the pages of Light Reading. The company has bungled acquisitions; it's been miserable at retaining employees (see Lucent Faces "Exodus of Nexabit Staff"); got religious about ATM (see ATM: Over and Out? and Lucent's Poor ATM Numbers Confirmed); led a failed experiment in DWDM vaporware (see The Last Laugh Is On Lucent); missed the 10-gig transport market; and is now playing catchup in optical networking in general, at a time when aggressive startups like Corvis and Sycamore have filled their coffers with IPO cash. Networking giants such as Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Corp. (NYSE/Toronto: NT) have fueled their corporate growth by successfully introducing new optical product lines and making strategic acquisitions, while Lucent simply missed one boat after another. In its latest earnings warning (Lucent might as well start scheduling conference calls for its warnings, as well as for its earnings announcements, because they appear with such regularity), the company said its optical systems revenue would be down 5 percent in the quarter from the year-ago period. Yes, that's right -- the company announced negative growth in one of the fastest growing segments of the technology market.

The good news: This grim situation couldn't be more company-specific. Lucent is losing, and others are winning. Which is to say: Optical networking's importance as a cog of growth in the networking sector has swelled, rather than abated.

The second part of the good news: The Lucent debacle reaffirms startup culture and underscores the importance of moving quickly and decisively in emerging technology markets. If you're not a startup, you must find ways to integrate them. Innovate or die.

The bad news, for Lucent shareholders: It's become evident from the deterioration of the financial situation that the current management team lacks the skills to turn this company around -- and Wall Street has voted on the matter. McGinn stated earlier in the year that he was spinning off Avaya Communication (NYSE: AV) (and now the components business as well) to leave Lucent with the highest-growth business. Well, now that he's whittled the company down, his share of the highest-growth business, optical networking, is actually declining. Call it the spin-down strategy, rather than a spin-off strategy.

On top of these strategic disasters, the current management team has done a miserable job of accurately assessing and informing the public of its problems and managing its relationship with Wall Street investors. The scorn for McGinn has reached epic proportions on Wall Street. One fund manager, asking not to be named, calls him a "pathological liar."

Even Wall Street analysts, traditionally polite in their research reports, are starting to question the explanations given by Lucent's management team.

"Over the last few quarters, Lucent management has suggested that many factors such as production constraints, lack of qualified installation employees, and aggressive pricing by competitors limited optical system sales and profitability," wrote Steven Levy, an analyst with Lehman Brothers, in a research report on Wednesday. "The company's management is now saying that the gating factor is customer acceptance."

At this point, Lucent investors still holding the stock might be so far down that they'd need to consider holding onto their shares and hoping for the best in the long term. The company is obviously heading for a major restructuring -- and possibly a revamped management team.

But can it get any worse? Based on management's track record, you have to assume yes -- it will get worse before it gets better.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

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