Optical/IP Networks

Lucent Warns -- Again

How bad can things get for Lucent Technologies Inc. (NYSE: LU)? Apparently, worse than people thought. The company, which has already warned about slower growth and missed investor expectations for the fiscal fourth quarter of 2000, issued yet another warning Tuesday after the market closed, stating that profit and revenue growth would be slower than expected and that the company would need to revise future forecasts and undertake major cost-cutting and restructuring.

On Wednesday Lucent shares were hammered, as investors appeared to lose all confidence. The stock lost $9.69, or 30.88 percent, to $21.69 in morning trading.

Based on analyst and investor comments following Tuesday evening's conference call, confidence in the Lucent management team appears to be further eroding, and the lack of optical networking growth is being viewed as a downright disaster.

Optical networking figured prominently in the news, as Lucent acknowledged that the company had basically "missed" the rampup in optical networking products, saying that its optical systems business had declined five percent for the quarter. This portion of the news was certainly the most ominous for Lucent, given that many of its competitors, such as Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Corp. (NYSE/Toronto: NT), are adding to corporate growth with the addition of optical products.

"In optical systems, we missed a product cycle," said Richard McGinn, Chairman and CEO of Lucent, during the conference call. "We're catching up to the marketplace; we're testing in many places. We were late to the market after being at parity a year ago, but we are catching up."

McGinn also attributed long certification processes at customer sites to the slow uptake of optical products.

The explanations did not sit well with many observers, who seem to be tiring of Lucent's changing explanations for why its networking business is losing ground.

"Their explanation is implausible and their actions are inexcusable," said one hedge fund manager after the conference call, asking to remain anonymous.

"Many markets are winner-take-all, making it very hard for laggards to play catchup," says Andre Desautels, analyst with Trilogy Advisors. "Add to that the loss of key people, and still heavy exposure to circuit switching and ATM equipment, and the business outlook for Lucent remains quite murky. Value investing in tech/telecom has rarely paid off, and often with good reason."

"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 note following the call. "The company's management is now saying that the gating factor is customer acceptance."

During the conference call, some analysts pressed for further explanation from Lucent officials but received few details.

"I'm still a little confused on optical. I'm wondering if you could give a little more flavor on what the actual problems were?" asked one analyst.

"Having missed that product cycle, we have been catching up. The fact that we don't have volume has given us margin pressures," said McGinn. "It is not a complex or mysterious situation; it is one of us having to execute against substantial opportunity in the marketplace."

Lucent officials said the company would move forward with major restructuring and cost cutting designed to streamline the company.

"The reality is that Lucent is in a major business turnaround," said Deborah C. Hopkins, Lucent's executive vice president and chief financial officer. "I believe we're sitting on a goldmine. We have a difficult job ahead, but we're intent on doing it.

Hopkins said this entails "taking it apart and putting it back together."

Overall, the company warned that it expects earnings per share from continuing operations for the quarter, which ended September 30, to be in the range of 17 cents to 18 cents, compared to 24 cents for the year-ago quarter. The company expects to report pro forma revenues from continuing operations in the range of $9.3 billion to $9.4 billion for the quarter, a 14 percent to 15 percent increase over the prior year period.

Lucent officials also stated that they would have to revise revenue and earnings forecasts for 2001, most likely downwards.

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

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