Lucent Weighs on the World

In an eventful morning, execs at Lucent Technologies Inc. (NYSE: LU) called an early news conference to warn of top-line guidance changes in advance of the company's April 22 quarterly report (see Lucent Comments on 2Q02).

The company will not meet previous revenue forecasts of 10 to 15 percent quarterly growth, and this will delay the company's return to profitability, say company executives.

The news weighed on financial markets, slamming the brakes on what had been a fairly robust rally in telecom stocks over the past week (see Deal Talk Boosts Riverstone, LR Index). The Light Reading Index was down 8.03 (4.39%) to 175.07 in afternoon trading. Shares of Lucent lost 0.76 (12.14%) to 5.50.

At the same time, the company announced a series of new European contracts at the massive CeBIT trade show in Hannover, Germany (see Lucent Wires Slovakia, Britain). And it unveiled a new announcement about its multiservice switch, the TMX 880.

Does the good news outweigh the bad? So far, it doesn't look that way. Let's start at the top.


During the morning's press conference, CEO Patricia Russo said Lucent is lowering its revenue growth predictions for the present quarter to "modest-to-10-percent improvement," versus the 10 to 15 percent growth originally predicted.

This will delay Lucent's anticipated return to profitability and its hoped-for distribution of Agere Systems (NYSE: AGR) shares to Lucent stockholders. Right now, execs say, it looks as if cash-flow breakeven will "slip into fiscal year 2003," which starts October 2002. The company hopes the Agere spinoff will happen next quarter.

Execs say Lucent's goal of targeting gross margins "in the 20 percent range" this quarter are still achieveable, and the company's still aiming for 35 percent gross margins during fiscal 2003. Also, Lucent will continue to seek further liquidity, in part through an offering of convertible securities if market conditions improve.

The company's also on track to receive "substantial" tax rebates, thanks to legislation approved Saturday by President Bush that extends the timeframe for reporting operating losses. At the same time, though, lack of foreign tax credit allowances in the new law will force Lucent to take a charge of about 6 cents per share in the second quarter.

CEO Russo downplayed the guidance changes, blaming market conditions that have surfaced just over the past couple of weeks: "We have indicated we would have sequential revenue improvements. However, due to the fact that service providers are continuing to reduce or delay their capital expenditures as they rethink their business plans and look to conserve cash, that growth will not be quite as robust as we originally forecast."

Russo stressed that the new guidance is not the result of any competitive losses Lucent's experienced in the market: "You only have to look at the daily business news in the last few weeks to understand that this is a market issue, not a Lucent issue."

In response to specific questions, Russo and CFO Frank D'Amelio said the biggest shortfall in orders over the past couple of weeks is in Lucent's U.S.-based wireline business. Chief growth for this quarter will come from the company's wireless mobile equipment sales.

Analysts are taking the news stoically. "It clearly pushes things back... It's a disappointment," says Steve Levy of Lehman Brothers. Despite delaying hoped-for share price targets by a couple of quarters, though, the impact seems small. Levy says his firm will cut its guidance for this quarter from $3.8 billion to $3.6 billion. "It's not shaving hairs, but we're not far from it," he says. In the long run, he still maintains a positive take on Lucent.

"We don't hear of any competitive losses or production problems. It's the market... an environment where carriers are relentlessly cutting back," Levy says.

He's also intrigued by the possibility that Lucent may realize significant tax credits as a result of the new legislation. While D'Amelio wouldn't give specifics, it could be a nice windfall, Levy says: "It would make everyone feel more comfortable."


Lucent also announced several contract awards in Europe, in anticipation of the CeBIT show. During today's conference call, CEO Russo alluded to these wins as "exceeding $400 million." Here's a rundown:

  • BT British Telecom (BT) (NYSE: BTY) is using Lucent optical gear to create its biggest network yet, the carrier says. Specific terms weren't given, but the deal includes procurements of Lucent WaveStar BandWidth Manager, WaveStar OLS 400G system, and WaveStar TDM 10G. The network runs across southern England and includes subsea cable connections.

  • Slovakia Telecom Lucent's also scored a two-year contract worth about €5.5 million (US$4.8 million) with Slovakia Telecom, which is 51 percent owned by Deutsche Telekom AG (NYSE: DT). The contract is primarily for Lucent's Metropolis EON platform.

  • KPN Lucent's on track to sell its ATM-based GX-550 and CBX-500 Multi-Service switches to the Netherlands' KPN Telecom, which will use the switches in its nationwide network. Terms are undisclosed.

  • Easynet The Easynet Group, an independent pan-European carrier, has been using Lucent DSL gear in its live network since February. This appears to be a three-year contract valued at about $20 million.

  • Polish Communications Authority Lucent is strengthening its hold on the Slavic market by supplying this PTT with DSL gear. Terms were not disclosed.

  • T Systems Lucent is supplying unspecified backbone WAN gear to T-Systems Inc., a spinoff of Deutsche Telekom. Terms are undisclosed.
  • Lucent also "announced" its TMX 880 (see Lucent Unveils Core Switch), the multiservice switch that competes the other core routing switches emerging from older ATM gear (see Switch Vendors to Tackle Core Routing). While anticipated, the news here is that the TMX 880 is available and in trials with a "small number" of unnamed customers -- milestones the market has been waiting for.

    — Mary Jander, Senior Editor, Light Reading
    http://www.lightreading.com For more information on CeBIT, please visit: www.lightreading.com/cebit

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    yinjiandong 12/5/2012 | 3:27:30 AM
    re: Lucent Weighs on the World every superior,I am a communications worker.
    Pls communication each other.

    Dr.Q 12/4/2012 | 10:48:28 PM
    re: Lucent Weighs on the World It will be well into calendar 2003, perhaps 2004, before Lucent rebounds. The recent Telecom Bubble delayed a lot of critical internal reforms by about 3 years. Lucent was finally starting to root out the old AT&T corporate management, mindset, and ineptitude when the bubble came along, and suddenly there was no need to reform because they could make money--or LOOK like they were making money--without making any painful changes.
    Having worked closely with them in the 90's, it is sad to see a company with so much potential in Crash-and-Burn mode. They have, however, trained a lot of technical talent that is now spread from Sydney to Zurich. The legacy will live on, even if the Lucent name does not.

    - Dr.Q
    johnjohn 12/4/2012 | 10:48:26 PM
    re: Lucent Weighs on the World what will it take for the telecom industry to rebound? what will be the driving forces?
    dwdm2 12/4/2012 | 10:48:24 PM
    re: Lucent Weighs on the World johnjohn:

    what will it take for the telecom industry to rebound? what will be the driving forces?

    I am no expert in the telecom area but seems like telecom is doing as good as it always did. Actually telecom is doing better. Their legacy hardware is carrying more than expected.

    And this is so because I think the optical networking portion need to be separated from the telecom umbrella. If you do that, then of course, ON industry is struggling. What is it going to take to turn this around?

    I believe LR has an opportunity to do the research and make an outstanding report on these issues.

    DoTheMath 12/4/2012 | 10:48:21 PM
    re: Lucent Weighs on the World what will it take for the telecom industry to rebound? what will be the driving forces?

    I don't claim to know the answers. Here are my opinions.

    I believe for all its sex appeal during the boom, telecom has stayed a fundamentally inefficient industry, from service providers on down to equipment vendors. Most service providers still exhibit the old AT&T legacy thinking, and do not move fast enough to embrace anything. To see the point, think about what is the most "lucrative" service for them in 2002? Overpriced (local) voice on the consumer side, and overpriced T1 circuits on the data side. Think about how LITTLE your wireline telephone has changed in the last 25 years, and compare it to how MUCH your computers have changed in that period. Cellular is the honorable exception to this, and it is a highly competitive industry (than God). The local Bell morons will have you think that flogging call waiting at $3/month and voice mail at $6/month is "innovation" and in cellular they routinely bundle these in "basic".

    On the equipment side, think about how vertically integrated almost every major equipment vendor is. Does it make sense in a technologically fast moving industry to have ONE company do everything from semiconductors all the way to the top of the software stack? That is how the industry has been, and for the most part, still is. Again, there are exceptions such as Broadcom (which derives a lot of revenue from competitive ethernet segment), but by and large the industry organization is still inefficient, by which I mean a lot of needless duplication of work across the industry.

    Unfortunately, the boom did little or nothing to address the fundamental inefficiencies, but instead allowed inefficient players to borrow huge amounts of money (~ $1 trillion) thereby supporting the inefficiency.

    What will it take to get back to prosperity? My opinion is that a fundamental restructuring of the industry is needed. It may come about through Wall Street denying oxygen supply to the inefficient players, forcing the assets to move into efficient hands.

    But my fear is that a band-aid will be applied, and we will get back to "normalcy". In that case, we can pretty much kiss goodbye to innovation, and accept that $20/month voice and $1K/month T1 line will continue to be the "state-of-the-art" for a long time.

    The main hope is that the computer industry's dreams ride on something drastic happening in telecom, and the Microsofts, Dells and Intels have the clout and the money to force things to happen.

    Another way change may be forced is the relentless migration of voice minutes to ultra-cheap wireless, forcing the Bells to abandon traditional voice and find new ways to charge home users. But 256 kbits/sec hardly counts as "broadband" and yet that is the best they have to offer. It is a depressing sight.

    In any event, it is not going to be a fun 2 years. There will be massive pain, and the inherently capricious nature of creative destruction will ensure that those enduring punishment may not be the ones in a position to take it.

    DoTheMath 12/4/2012 | 10:48:16 PM
    re: Lucent Weighs on the World One word--COST

    While we are on the subject of costs, think about the economics of dial-up Internet vs DSL. Dial-up, due to the way the technology worked, did not need any cooperation from the Bells to succeed. In fact they tried obstructing it initially but gave up. Mom and pop could (and thousands did) offer dial-up at $20 all you can eat, with absolutely NO cooperation from the Bells. In fact, the knowledgeable kept muttering how $20 all you can eat is disaster for the industry, and yet the small guys WERE making money. The economics was very simple: $1.5K T1 line carries 24 modems, and with a load factor of close to 10, that is 200+ subscribers paying $20 a month. So you have $4K in revenue to pay for $1.5K in T1 costs + your depreciation + payroll. The local ISPs were so efficient that this was a major cash flow business, which explains why there were close to a ten thousand of them at the peak. There were guys who were running small ISPs out of their basements part time, and raking in $5K in free cash flow per month.

    Only the big boys with their bloated costs could not make money on this. Technically or economically, there is no fundamental reason why your DSLAMs should cost much more per port today than your 56K modem. Chips have gone cheap, and similar high density solutions are available. The only problem is that mom and pop ISPs cannot offer DSL without cooperation from Bells.

    This is about as clean an "experiment" as it gets in the real world, and dial-up adoption was exponential, while DSL adoption is crawling along. If it were possible to do DSL the same way dial-up is done (from an industry structure point of view), you will have much higher adoption and $20 all you can eat pricing, and not whining by the Bells that $50/month is not "economical" for them.

    Another thought about costs: the $1 trillion that has been wasted in telecom in the past 5 years is several times the cost of bringing fiber to every home and business in America. Even at the outrageously bloated $5K per fiber drop, you are talking of the order of $500 billion to "fiber" everyone up.

    Efficiency often comes when you take a hammer to another company's cost structure and be merciless. The incumbent will whine about "uneconomic" pricing, and how such pricing will "destroy" the industry, but that is just their bloated cost structure talking. Dell explains in his book how he was flabbergasted when he noticed that IBM was charging $3K per PC, when the cost of goods for the parts that Dell, then small guy, could get in the free market was $1K. So there was HUGE undercutting he could do, and still make a ton of money. That explains why, just like your local ISPs, there were so many no-name PC vendors.
    dwdm2 12/4/2012 | 10:48:16 PM
    re: Lucent Weighs on the World One word--COST

    Very nice analysis. However, in light of a recent LR article (see graph 2: Normalized cost trend...) http://www.lightreading.com/do....

    Paraphrasing: "The exponential decay of cost trend illustrated in the above indicates the industry is continually squeezing as much value for money as possible out of transmission equipment, making a move over to these new technologies an increasingly attractive proposition."

    Dr.Q 12/4/2012 | 10:48:16 PM
    re: Lucent Weighs on the World johnjohn asks:
    >what will it take for the telecom industry to >rebound? what will be the driving forces?

    I feel a little like that famous line in "The Graduate", but here goes: One word--COST.

    The telecom industry is cyclical (I've ridden through several boom & bust cycles). This past boom & bust has been by far the worst, highly exaggerated because of large amounts of (very naive) money being pumped into the market, but historically it is NOT an anomaly.

    Let's look at today's revenue picture: Millions and millions of users are looking for a price point of zero for communication service--they want to pay a modest connection fee and then get unlimited usage (just like most local phone service). Under increasing (though perhaps still inadequate) competitive pressure, the service providers must expand their 'billable minutes' far faster than they reduce their per minute cost in order to stay solvent. (This is why the RBOCs lobby ferociously to get into the long distance business.) Until there is the next killer ap--the long awaited 'bandwidth to the home', or perhaps high traffic metro-ring--the providers are farting around with things like call waiting and voice mail to try to squeak out a few more pennies.
    Where does that leave them? If they are going to increase--or even hold--their profit margins, they have to squeeze down their costs by:
    1) Reducing capital investment;
    2) Reducing installation costs;
    3) Reducing operating costs.

    What this comes down to is that the industry has to have more cost effective hardware and software. On the hardware side, it means tremendous reductions in component & assembly costs, on the software side it means smarter & more flexible software. (I have heard that due to superior software, Ciena SONET systems takes several hours to install, while Lucent SONET systems take several weeks. Can anyone comment?)

    There is an analog of Moore's law for optical fiber systems--the transmission capability (bit-kilometer/sec)has grown exponentially, and the cost per bit-km/sec has dropped correspondingly. However, the exponential growth in deployed systems lags the growth in laboratory R&D systems by a few years, and the question "Do we really NEED all that extra bandwidth?" is very, very real.

    The challenge is now to continue to drop the cost per bit by actually reducing the cost.

    dwdm2 12/4/2012 | 10:48:15 PM
    re: Lucent Weighs on the World Another thing appears to be somewhat unique for the optical netwroking industry is that they took upon themselves the responsibility of developing the technology in addition to make money out of it.

    Historically these two areas, i.e. research/invention/development and manufacturing/marketing were separate endeavours. In the ON industry while there is still some separation, however, for most part it is quite intermingled.

    The main reason, in my assessment, is the dumping of VC and their expectation of quick return; producing excessive competition and redundant efforts as opposed to "coopetition" (as pointed out by another poster).

    This environment is more chaotic than constructive. The rate of hiring and firing is more vigorous in ON industry than anywhere else, turning it into a cruel environment. The industry is solely dictated by a market space which is not as strong as necessary to become healthy. There is no other safety net for sustenance for the companies than laying off people if the market is not kind.

    Just my two cents.
    rjmcmahon 12/4/2012 | 10:48:14 PM
    re: Lucent Weighs on the World I don't claim to know the answers. Here are my opinions.

    In my opinion, your *claims* reveal answers ;-)
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