Lucent: What's Another $8 Billion?

Lucent Technologies Inc. (NYSE: LU) today reported its fourth fiscal quarter 2001 earnings (see Lucent Ends Its Year). And despite ongoing losses, a staggering $8 billion restructuring charge, and declining revenue, the company says it's on track for a return to profitability next year.

"We have a lot of work to do, but we are energized by the challenge," CEO Henry Schacht told Wall Street analysts on this morning's conference call. "We've proven we can do what we say we can, and we'll continue the process of restructuring to return to profitability and positive cash flow in fiscal 2002."

The company registered a net loss on the quarter of $8.8 billion. The bulk of those losses came from an $8 billion charge: $4.6 billion for asset writedowns, $1.1 billion for employee separations, $1.2 billion for a voluntary retirement plan, $282 million for pension curtailment, and $850 million in other charges.

While staggering, these restructuring charges were important because they enable Lucent to trim expenses in order to get closer to the target of profitability in 2002. Earlier in the year, an agreement with creditors prevented Lucent from taking further restructuring charges, but in August Lucent reached a new agreement with creditors to allow further restructuring (see Lucent Breaks Through on Covenants). In fact, the agreement with creditors is essential to Lucent's recovery (see Lucent: Devil in the Details?).

Lucent's still got its work cut out: The company reported a pro forma loss per share from continuing operations of 27 cents on quarterly revenues of $5.2 billion. These results, which missed the First Call consensus of $5.3 billion and 23 cents net loss per share, exclude special business restructuring and one-time charges of $8 billion. Fourth-quarter revenues declined 28 percent from the same time last year and 10 percent from the preceding quarter.

In midday trading, Lucent shares were trading at $6.64, down 0.26 (3.77%).

For fiscal 2001, Lucent's posted a loss of $14.2 billion, or $4.18 per basic and diluted share. Much of this loss stemmed from billions of dollars in special restructuring charges. In fiscal 2000, the company reported net income of $1.4 billion, or earnings per diluted share of 43 cents.

Lucent's got several reasons why this grim picture isn't the whole picture:

Workforce reductions continue unabated. A third reason Lucent's on the right track, says management, is that its axe continues to swing. By the end of March 2002, the company will have cut its workforce by roughly 46 percent since the start of 2001.

Lucent's already reduced headcount by 29,000 since the start of the year (about 27 percent of total staff). There are now 77,000 people working at the company. Lucent plans to continue reductions until it reaches a workforce of about 57,000 to 62,000 -- indicating the elimination of up to another 25,000 staffers.

In an odd inversion of other firms' use of the September 11 attacks, Schacht claims the tragedies helped Lucent to prove that these workforce reductions have helped, rather than hindered, its ablity to respond to customer needs.

After expressing sympathies to the victims, Schacht said he was intensely proud of the 500-odd Lucent folk who worked 12-hour shifts following the attacks in order to help restore customer service.

"This was the first true test of our newly restructured company," he said. Employees' performance showed that Lucent's restructuring efforts have led to efficiency, speed, and dedication in service and supply chain functions, he said.

Lucent expects to see improvement in its declining revenues in the second fiscal quarter 2002, despite first-quarter sales declines of 10 percent or more due to the overall economic downturn and the impact of September 11.

The company also expects its gross margins to rise from the current 12.5 percent level to 35 percent by 2003, based on a combination of further cost reductions, improved sales volumes, and a mix of products that includes new offerings in wireless and optical networking.

Speaking of those product segments, Lucent said that although revenues were down for the quarter, they were actually up 26 percent for wireless gear. And even though the optical networking business was "down a bit quarter to quarter," execs claim it's "still strong." In other parts of the business, circuit switching and professional services were both down sequentially -- services by 29 percent compared with one year ago.

Analysts asked Lucent many questions related to its plan to return to profitability next year. Among other things, the session turned up the news that the company still plans to spin off Agere Systems (NYSE: AGR) within six months. A requirement to achieve that goal will be the return of the company to positive EBITDA (earnings before interest, taxes, depreciation, and amortization) in the quarter preceding the spinoff.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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