Optical/IP Networks

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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