Lucent Toes the Line

Is there light at the end of this tunnel? Lucent Technologies Inc. (NYSE: LU) this morning reported earnings that were in line with expectations and issued more hints about its reinvention as a large-scale reseller and services vendor.

Lucent officials said the company will continue to push for partnerships, particularly in IP core networking, in an effort to gain profitability by the end of this year, despite a continued bleak outlook for the overall market.

In its first-quarter earnings report this morning, Lucent reported revenues of $2.08 billion, down 9 percent from last quarter's results and down 42 percent from the same quarter last year (see Lucent Loss Narrows in Q1). The dip corresponded with the low end of Lucent's previous guidance, which called for sales to be flat to down 10 percent.

At the same time, thanks to various steps Lucent's taken to reduce costs and liabilities, the company reported a net loss of only 11 cents per share, an 87 percent decrease in net loss since last quarter. Further, execs say they're hoping for a 20 percent increase in revenue next quarter, with corresponding bottom-line improvements.

The company still hopes to close 2003 profitably, with gross margins in the 35 percent range and a breakeven level of $2.5 billion in revenues. Lucent's also hopeful that revenues from services and new products, including optical ones, will help increase sales to about $2.5 billion for each of the remaining quarters of 2003.

"We are very clear on what we need to do, and very focused on getting it done," said CEO Patricia Russo on a conference call with analysts this morning.

High on the "to do" list is continued, increased emphasis on "end-to-end solutions" -- in other words, services along with products. To help the trend along, Lucent plans to bulk up its services capabilities through partnerships in key areas of carrier demand, such as the one announced yesterday with Cisco Systems Inc. (Nasdaq: CSCO) for mobile accounts (see Lucent & Cisco: Together at Last).

Lucent also is thinking of seeking a partner to address the IP core, Russo said: "In the IP core, we will look to partner and will evaluate [alternatives]." In the area of multiservice edge switching, though, the company's still evaluating whether to partner or go it alone.

At least one observer thinks yesterday's announcement with Cisco, along with speculation that Lucent will take a partner such as Juniper Networks Inc. (Nasdaq: JNPR) for IP core routing, are among the most significant moves Lucent's made recently.

"Lucent's crossed the Rubicon," says Steve Kamman of CIBC World Markets. By refocusing on areas it does best and partnering with successful players in certain areas, Lucent could improve its prospects.

The question remains, though, whether any strategy will allow Lucent to significantly improve sales in a market that's still in the trough. Lucent's revenues have dropped dramatically in all market segments (see below), and Russo and CFO sidekick Frank D'Amelio clearly stated today they're not "forecasting an improvement in the overall market."

In fact, Lucent anticipates (without stating an actual expectation yet) that total revenues for 2003 could be 20 percent lower than 2002, following the trend of what Russo calls a market that "remains challenging and uncertain." This quarter alone, revenues from U.S. sales were down 10 percent, while international ones declined about 7 percent -- due to capex reductions by carrier customers worldwide.

So just how does Lucent plan to reach its goals, given the current macroeconomic doldrums? Execs had several answers:

  • Ongoing layoffs: Lucent plans to keep shrinking expenses in a range of ways, including the layoff of another 5,000 employees by March 31, 2003. This past quarter, 7,000 were eliminated, bringing the census to about 40,000. By the end of the year, the company wants to have just 35,000.
  • Wireless sales: Lucent will see growth over the next quarter across all businesses, D'Amelio said, but particularly in mobility, where the company sees upticks in Asia, China, and North America -- in that order. Growth will come from a combination of new business and already-pledged contracts. Russo added that wireless installations worldwide are apt to grow at a larger rate than wireline ones, since wireless nets aren't constrained by the capacity overbuild that wireline networks have suffered.
  • Services: As noted, Lucent's counting on services as a key to future revenues. Of 20 new contracts Lucent gained this quarter, eight are services-intensive, execs said today. What's more, partnerships are expected to help the segment grow beyond the limitations of Lucent's product line -- eventually, anyway.
  • New products: Lucent's still got a lot of confidence in optical networking, particularly in the metro space. Russo says customers materialized this quarter in China, Eastern Europe, and Indonesia.
  • Debt, equity, and cash transactions: Lucent has taken a number of steps to adjust its balance-sheet positions, including buying back more than $1 billion in convertible securities. This past quarter, for instance, the firm exchanged $392 million worth of preferred stock and securities for 214 million shares of common stock. Possibly to help fuel future buy-backs, the company issued a shelf registration with the Securities and Exchange Commission (SEC) today, paving the way to create more shares that could be used to buy back even more convertibles.

The jury's out on whether all this will work. As rival telecom supplier Alcatel SA (NYSE: ALA; Paris: CGEP:PA) did last week, Lucent warns that the overall market is unlikely to match any internal progress it manages to make (see Alcatel Offers Tempered Optimism). Instead, the company seems bent on honing its structure to match the overall economy, in a bid for survival. In doing so, it's banking on particular areas, such as partnerships and wireless, for which the future's cloudy.

Nonetheless, investors seemed buoyed by Lucent's call this morning. At press time, shares were trading at $1.75, up $0.07 (4.17%).

— Mary Jander, Senior Editor, Light Reading
BenGrahamMan 12/5/2012 | 12:49:39 AM
re: Lucent Toes the Line My Lucent CC Notes

This is a work in process. Best viewed at link below, because of many hyperlinks Disclaimer is also important to mention.


January 22, 2003


Conference Call Notes and Observations

Lucent Technologies, Inc.

3 Months ended December 31, 2002

please see Disclaimer at bottom of report

This report was last amended on January 22, 2003.

Lucent Technologies, Inc. designs and delivers networks for the world's largest communications service
providers. Backed by Bell Labs research and development, Lucent, claims to rely on their
strengths in mobility, optical, data and voice networking technologies, as well
as software and services, to develop next-generation networks. Lucent, claims that their systems,
services and software are designed to help customers quickly deploy and better
manage their networks and create new, revenue-generating services that help
businesses and consumers.

Lucent Technologies financial release for first quarter of fiscal 2003

Notes From Conference Call

Pat Russo - Chief Executive Officer:

Claims to have made good progress on road to profitability. Cash usage was better than anticipated during quarter. Down to about 40,000 employees. Has retired more than a billion dollars of convertible debt. Reaffirming revenue guidance. Targets increased gross margins and $2,500 revenues in Q2'03.

Frank D'Amelio - Chief Financial Officer

1. GAAP results were used. Lucent has eliminated Pro-Forma reporting.

2. Service Revenues were 468 million.

3. Gross Margin was 22 %. Gross margin improved from prior quarters. By end of F2003 , Lucent expects gross margins in the mid 30's.

4. Lucent expects bottom line improvement next quarter.

5. Lucent feels it is on the road to proper cost containment .

6. R&D was $389 million.

7. Cash used was $ 742 million. Capital spending was 155 million. This includes repurchase of real estate. Restructuring dollars used were $ 212 million.

8. Cash declined by $ 700 million from prior quarter. Including 200 million for restructuring. Expects cash usage of 1.6 billion for remainder of year. Interest is expected about 300 mil, (which calculates to 100 mil per quarter... these are my interpretations).

9. Shelf filing for debt later today for $ 1.77 billion. This will replace existing debt shelf.

10. Annual interest and dividends will be reduced annually by $ 90 million. This was caused by the buy back of convertible debt.

11. Plans for F2003 revenues to be down 20 % from F2002. Plans return of profitability by end of F2003.

Pat Russo - Chief Executive Officer:

1. The market remains challenging and difficult.

2. Customers are understanding advantages of using Lucent.

3. Strengths in products and new contracts.

4. Emphasizes service contracts.

5. Partnership Strategy becoming more important. This increases opportunities for software and services. The Cisco contract is an example of the Partnership Strategy. Cisco relationship will benefit software and services.

6. Overhaul of entire supply chain has been a priority over the last 18 months. This has been successful in operating margin improvements.

Question and Answers

1. Pat explained that Lucent is committed to working in data market. Looking for MPLS capability. Will look to partner. One place is the IP core.

2. Service business projection for 12 months will be tied to overall volumes and product volumes. Service business should step up with other business. Lucent did not discuss whether Services will increase or decrease for F2003. Frank later mentioned that Service Revenues declined 16 % QoQ.

3. Lucent offers no update as to what long term gross margins will be.

4. Lucent sees greatest increase in Q2'03 revenues in mobility.

5. Question was asked about 10 % customers. There was one, 10 % customer. Who is that customer ?

6. Lucent will not give further input on Pension contributions. No payments expected in F2003 and will possibly have a payment in F2004, yet Frank mentioned is it is unlikely that F2004 contribution would be required. Current estimates are up to $ 350 million for post retirement health care payments.

7. Question on current quarter Book to Bill . Backlog is 1.9 billion. According to Frank, Book to Bill should not be used as an indicator. We still would like to know what Book to Bill number is. Perhaps it was mentioned in conference call, but we did not pick up on it.

Some Gǣ back of the envelopeGǥ financial observations

1. It is interesting to see that Lucent is seeking breakeven results with $2.50 billion in revenue. Here are some comments that Lucent made one year ago ( January 22, 2002 ).

A. Breakeven levels will drop before end of fiscal year. Lucent believes that this quarter was the worst we will see in revenue. Believes revenue next quarter will increase 10 G 15 %, with even a greater improvement in bottom line. Lucent believes that breakeven can be attainable at $ 4.25 billion, this is a reduction from prior $ 4.75 billion.

B. For Fiscal year Lucent claims that margins in the 20's are available to them in Q2'02. Given the uncertainty in the market conditions, they can't give certainty to these levels. Henry said that they need > 22 % gross margins to achieve positive cash flow. Henry feels that is quite attainable. Reminded us that F2003 gross margin targets are 35 % sometime in 2003. Lucent said they ended December quarter with 62,000 people. Lucent sees this headcount declining by end of June to less than 55,000. These expense reductions will be evident in cash flow shortly.

C. Henry Schacht finished the call by saying that the achievements by Lucent that were discussed one year ago are being met. Organizational changes have been put into place, funding and liquidity has been attacked, CEO has been hired. Henry sounded pleased and Lucent sounds driven to achieve results. Henry is looking forward to a discussion again in 3 months. He looks to accelerate from here. Pat Russo will chair next meeting and Henry said Gǣ I know it will be a marvelous quarter .Gǥ

2. Days Sales Outstanding (DSO) is 63 days. One year ago, DSO was 98 days.

Receivables appear to be managed properly, yet revenues are so low, that this ratio is not as valid. If Lucent ever reaches revenue stability, this ratio should prove to be a more useful indicator.

3. Current Ratio (Current Assets / Current Liabilities) is 1.48. One year ago this number was 1.86

4. Accounts Receivable decreased $ 181 million from Q4'02, sales decreased $ 202 M from Q4'02. If you project revenues to $9.6b B for F2002 (not our projection, just a Gǣwhat-if Gǣ argument) then A/R as a % of revenue would be 15 %. Accounts Receivable, as a % of Revenues was13.37 % in F2002, 21.57 % in F2001, 28 % in F2000, 29 % in F1999 and 23 % in F1998. Receivables appear to be managed properly, yet revenues are so low, that this ratio is not as valid. If Lucent ever reaches revenue stability, this ratio should prove to be a more useful indicator.

5. Inventory decreased $ 270 M. Again, if we extrapolate F2002 revenues to an arbitrary $9.6 billion, the Inventory/ Sales ratio would be 11 %. Inventory / Sales Ratio at F2002 was 11.06 %, F2001 was 17.12 % and 17.65 % in F2000.

6. Acid Test Ratio (CA- Inventory)/CL is 1.29. In F2002 the ratio was 1.23, F2001 where it was at 1.22 and from F2000 of 1.01 and F1999 of 1.14.

7. Research and Development was $ 389 million, or 18.75 % of revenues. The last known guidance I can recall regarding R&D is that Lucent claims it will level out at 12 %. This was discussed by Lucent in 2001. I do not recall if it was discussed subsequently.

8. Need to look at tax benefit on income statement and tie in with SFAS 109. We want to make sure there is no aggressive accounting here. We are not to concerned since the survival of Lucent sure goes much further than a $ 120 million dollar P&L item.

9. Cash usage relative to quarters going forward. Expected improvement in second half of F2003. Uplift of revenues will cause pressure on cash flow in Q2'03. This is a concern of ours. Something to watch. If Lucent ultimately guides down in second half of 2003, this could cause great difficulty and potentially not enough time to adjust ones investment.

10. We would like to know a detailed explanation of Pension benefits and expected payments for each of the next 5 fiscal years.

11. Flow Ratio is 1.09. The Flow Fatio is desired to be less than 1.25. Here is the formula : Current Assets = $ 8,243, Cash = $ 2,408, Current Liabilities = $ 5,547 and Short Term Debt = $ 193.

Flow Ratio = (CA - Cash) / (CL - STD) = 1.09. The ratio was 1.01 on December 31, 2002, 1.48 on December 31, 2001 , 2.85 at FYE2000 and 2.36 at FYE 1999.

12. Book Value is a negative number.

13. There was no current disclosure or discussion of SPE's

Belzebutt 12/5/2012 | 12:49:37 AM
re: Lucent Toes the Line I guess LU suffered a reverse flush in Q4?
lightmaster 12/5/2012 | 12:49:36 AM
re: Lucent Toes the Line The article stated: "Lucent expects total revenues for 2003 to be 20 percent lower than 2002"

They were very emphatic that they were NOT predicting 2003 revenue at all, just managing the business financially to that number. In fact, one financial analyst asked whether the number included RBOC regulatory relief and they re-itterated that the number was not an expected revenue figure and had no basis other than a number that they had picked to use to manage expenses. The only quarter that they gave visibility for was the next quarter at 2.5 billion.
BobbyMax 12/5/2012 | 12:49:35 AM
re: Lucent Toes the Line Reducing the Lucent's workforce 35,000 personnel is a good idea but it should be implemented soon. It was expercted that Lucent will sell its own wireless and mobility products. It should not have agreed to sell cisco's wireless products.

It appears to me that Lucent's productivity is very low and it is not ableto exploit the serouces of Bell Labs fully.

My biggest fear is that Lucent may become a company like xeros and may go forever withouit becoming profitable.

The recent stories on stock option awards to Mrs. Russo and Mr. Schact is also very troublesome to the shareholders and industry experts.

More products are expected from Bell Labs/Lucent. These products need to be announced so that the third rate equipment vendors do not snatch away the market from Lucent.
puddnhead_wilson 12/5/2012 | 12:49:35 AM
re: Lucent Toes the Line thanks BGM!
WiserNow 12/5/2012 | 12:49:28 AM
re: Lucent Toes the Line The problem is that as Lucent cuts jobs, they are cutting product development jobs. Whenever they shut down a product, all the development engineers go. The portfolio decisions have less to do with future profitability of a product than whether the product is producing profit this quarter or next quarter. The 5E remains profitable, but anything that could compete with 3rd rate startups is not yet profitable.

Since Bell Labs does research and don't make products, they are immune to job cuts. So yes, BobbyMax' Xerox comparison is likely to be quite apt.
Mary Jander 12/5/2012 | 12:49:25 AM
re: Lucent Toes the Line This is a good observation. I've adjusted the wording in the sentence a bit to communicate more clearly Lucent's position on the 2003 revenues.
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