Lucent's Back in Black

Lucent Technologies Inc. (NYSE: LU) reported its first profitable quarter since March 2000 in its year-end fiscal report this morning (see Lucent Posts Q4 Profit). And while execs weren't promising anything, they waxed upbeat on the company's future.

Net income was $99 million, or 2 cents per share for the fourth quarter, compared to a net loss of $254 million, or 7 cents per share, last quarter. Revenues of $2.03 billion were up 3 percent sequentially. And even though overall revenues were down about 11 percent year-over-year, gross margins were up dramatically: In the fourth quarter of 2002, gross margins were a negative 14.3 percent of revenues; this quarter they were 43 percent, driven by cost reductions, a better mix of products and services, some favorable one-time items, and improved volume.

Operating expenses were down 38 percent sequentially, to $524 million, thanks to ongoing restructuring and some items that included employee expense "adjustments" and credits from customers and suppliers.

Execs aren't offering guidance figures for next quarter. But CFO Frank D'Amelio said he expects gross margins to hover in the range of 35 percent, while the company heads toward "sustainable" profitability, breaking even on about $2.2 billion in quarterly revenues.

While acknowledging that it's too soon to call a bottom to the telecom downturn, Lucent CEO Patricia Russo came close to actual optimism in her conference call to analysts this morning: "The worst does absolutely seem to be behind us," she said.

Russo said Lucent is done with the main thrust of its restructuring. With headcount at 34,500 as of September 30, down 7,500 for the year 2003, the company is now focused on trimming jobs as needed, but adding them here and there as well.

Lucent reported a complicated series of one-time items both favorable and unfavorable, including new valuations on warrants set to be issued as part of the company's pending settlement of multiple lawsuits with shareholders and others (see Lucent Settlement Gets Preliminary Nod). It also took a hit on asset impairment related to development of universal mobile telecommunication system (UMTS) software.

The company expects ups and downs going forward, Russo said, but on the whole it finds itself in a stable place. Further, there are "pockets of opportunity" in the telecom market, despite ongoing capex cuts. Metro optical, 3G mobility, broadband access, services, and voice over IP (VOIP) are all areas in which Lucent sees growth.

Indeed, optical networking revenues grew 30 percent to $215 million this quarter, with lifted by strong sales of the LambdaUnite multiservice switch as well as of Metropolis and other metro optical gear. Also up significantly was data and network management -- including broadband access, multiservice WAN switches, and network operations software -- which grew 22 percent to $301 million this quarter.

In response to analyst questions about packet voice, Russo insisted Lucent hasn't given up on softswitching, promising that the company plans a major VOIP platform rollout "in the not-too-distant future."

Noticeably absent from today's Wall Street session was the back-slapping "congratulations on the quarter" from listening analysts that sometimes accompanies good reports. Instead, most seemed focused on whether Lucent can sustain its momentum, or if it will continue to struggle for sustainable profitability. "Lucent continues to be faced with a volatile revenue base due to spending fluctuations by large customers," writes Bill Lesieur, director of Technology Business Research Inc. (TBR), in a note this morning. He's also concerned that Lucent's focus on expanding its services and partnerships could hamper technological innovation.

This concern is shared by analysts in our Heavy Reading research division, which concluded in a recent report: "Lucent is abandoning its own convergence products in favor of reinventing itself as a service organization. It will fail." (See Lucent: The Truth Hurts.)

There have been signs, though, that Lucent's not alone in thinking it's made it out of the woods: Analyst Steve Levy of Lehman Brothers used Lucent's expected revenues as support for raising his view on the entire telecom sector last month (see Lehman: Telecom Downturn Is Over).

At press time, Lucent shares were trading at $2.55, up $0.10 (4.08%).

— Mary Jander, Senior Editor, Light Reading

jj388 12/4/2012 | 11:19:28 PM
re: Lucent's Back in Black This story lists $300 million in network management and operations software. Anybody have an idea of the product breakdown in that number? Lucent has dozens of products in this space, I was wondering which ones sold the most.
BenGrahamMan 12/4/2012 | 11:19:25 PM
re: Lucent's Back in Black Here is a link to my notes. I find the link is better viewing and navigating. I will also possibly correct in the future. Constructive criticism and error correction would be appreciated. I have posted all except for disclaimers and such.


Notes From Conference Call

Pat Russo - Chief Executive Officer:

1. Fiscal 2003 book closing should be the close of the chapter for the pain of Lucent and the industry. Industry remains challenging, but believes bottom is in. Focus is in top line, managing bottom line and achieving profitability, which should occur in F2004. Premature to call recovery, but seeing stability and pockets of opportunity. Sees pockets of opportunities in areas like services, metro optical, VOIP, broadband access and high-speed wireless data. First profitable quarter since March 2000 ( If my fingers and toes are correct, that was 14 quarters).

2. Revenues increased 3.0% sequentially from prior quarter. Positive segment income in Mobility and Wireline.

3. Revenue not yet recognized from revenue delay mentioned last quarter. Pat mentioned that all is going well with that deployment and feels strongly that revenue will be recognized.

4. Margins up significantly at INS and Mobility.

5. Starting to see impact of increased sales in higher margin Next Generation products.

6. "Impressive accomplishments in last 12 months."

7. Significant optical portfolio wins, including AT&T. Metro optical is where growth is being seen. Optical business had "very strong quarter".

8. Broadband access is strong, especially in Europe. Mentioned major access win in Canada last week. SoftSwitch and VOIP is strong. VOIP professional services is seeing opportunity and a great future market. Pat discussed later in the day on CNBC that Lucent is committed to VOIP.

9. Tough year for Mobility and Wireless, but feels that difficulty is behind Lucent. Mentioned China Unicom, Verizon Wireless, Sprint and Korea Telecom. Conducting UMTS interoperability tests in China. Expects to make UMTS contract announcements from Europe soon.

10. Like Frank, Pat has warned that quarterly results will be lumpy in near future.

Frank DGÇÖAmelio - Chief Financial Officer

1. "Good numbers and good quarter."

2. US Revenues flat. 60% domestic and 40% international. Readers need to keep in mind that currency fluctuations and the weak US dollar may have distorted results in a positive fashion. This was not mentioned in the call, but the weak dollar and its positive affect on US companies, is something that we have been observing in our economic research.

3. Earnings include negative impact of asset impairment charge related to capitalized UMTS software development costs. Also includes negative impact of warrant revaluations from shareholder lawsuit. These costs were offset by the positive impact from customer financing and bad debt recoveries.

4. Restructuring plans are essentially complete. Half of the reversal impacted gross margin.

5. Re-assessed the value of previous UMTS capitalized software costs. Charge of $50M was recognized in R&D.

6. US Pension plans do not expect any contributions in F2004. Expects to contribute $300m to $350M in 2004 for Health Care. A non-cash charge to equity of $594m was recorded. This relates to the management pension plans. This resulted in a reversal of $165m of previously recognized income tax benefits.

7. Mobility Solutions revenue was $856M. This was a sequential increase of 4%.

8. First quarter of operating income for INS since the change of segments over 2 years ago. INS revenues were $1.11B, an increase of 5% sequentially.

9. Lucent Worldwide Services (LWS) were $460M or an increase of 5%. Related primarily to higher margin maintenance services.

10. Gross margin increased sequentially by 14 percentage points. Gross margin increased to 43% from 29%. Increase was from favorable product and services mix and continued cost reductions.

11. Emphasized future investments in Voice Over IP.

12. Goodwill impairment of $35M.

13. Capital Spending was $65M. Cash used for business restructuring was $95M.

14. Repurchased $500M of convertible securities and debt obligations. This will result in an annual reduction of $50M in fixed charges.

15. More than $2.1 billion of convertible and debt obligations have been bought back or exchanged in the last year. Cash used was $487M for the fiscal year and common shares exchanged were 621M. This action resulted in $130M reduction in annual interest and dividend requirements.

16. Annual revenues were down 31% from prior year. Most of decline was due to decline in spending by US Service Providers. Services Revenues were down from $2.7B to $1.8B. Mobility Solution revenues were down from $5.5B to $4.0B. INS Revenues were down from $6.2B to $4.2B. Total expenses were down $5.6B.

17. Working Capital declined by $600M in F2003.

18. During F2003 employee headcount was reduced to 34,500. Lucent at its peak had 106,000 employees. At the end of F2002 headcount was 47,000.

Question and Answers

1. Question on Gross Margin going forward. After a lengthy discussion, which didn't say a heck of a lot, in terms of going forward, the gross margin of 34 to 35% was emphasized. We will project this amount going forward.

2. Question as to break even with a gross margin of 35%. Hence, taking out bad debt , vendor financing expenses. You will see that quarterly breakeven is about $2.2 billion. Again, Frank emphasized lumpiness of costs and revenues , quarter to quarter. Frank mentioned that the $2.2b could be improved upon.

3. Frank expects that Services will get to a 25% gross margin and then be improved upon. Pat added that operating margin should be 10 to 15%. She mentioned that margins increase at latter end of contracts. This will become more evident as business grows and matures.

4. Revenue Guidance for F2004 is flat to slightly up from F2003.

Some GÇ£ back of the envelopeGÇ¥ financial observations

1. Current Ratio (Current Assets / Current Liabilities) is 1.56. The ratio was 1.60 at June 30, 2002, 1.40 at March 31, 2003, 1.48 at December 31, 2002 and at December 31, 2001 it was 1.86.

The following table lists prior Current Ratios :

September 30, 2003 1.56

September 30, 2002 1.40

September 30, 2001 1.60

September 30, 2000 2.00

September 30, 1999 2.10

September 30, 1998 1.50

September 30, 1997 1.20

September 30, 1996 1.20

2. Accounts Receivable decreased $109 million from Q2GÇÖ03, sales increased $62M from Q2'03. If you project revenues to $8.5B for F2004 (not our projection, just a GÇ£what-if GÇ£ argument) then A/R as a % of revenue would be 17.8%. 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.

Accounts Receivable Turnover ratio (Sales/Average Accounts Receivable) is 5.60. On the face, this has shown improvement. Just another metric to watch.

The following table lists prior Accounts Receivable Turnover Ratios :

September 30, 2003 5.6

September 30, 2002 3.9

September 30, 2001 3.2

September 30, 2000 3.3

September 30, 1999 3.3

September 30, 1998 3.8

September 30, 1997 5.4

September 30, 1996 3.1

3. Inventory decreased $174M. The decrease in inventory is a potentially good sign, as Lucent saw gross margins increase, even though inventory decreased ( a higher inventory would increase margins) .Again, if we extrapolate F2004 revenues to an arbitrary $8.5B, the Inventory/ Sales ratio would be 7%. Inventory / Sales Ratio at F2002 was 11.06 %, F2001 was 17.12 % and 17.65 % in F2000.

Inventory Turnover ratio (Cost of Sales/ Average Inventory) is 6.60. On the face, this has shown improvement. Just another metric to watch.

The following table lists prior Inventory Turnover Ratios :

September 30, 2002 6.6

September 30, 2002 4.3

September 30, 2001 4.1

September 30, 2000 3.7

September 30, 1999 3.7

September 30, 1998 4.2

September 30, 1997 4.9

September 30, 1996 2.8

4. Quick Ratio (CA- Inventory)/CL is 1.44. On the face, this has shown improvement. Just another metric to watch.

The following table lists prior Quick Ratios :

September 30, 2002 1.44

September 30, 2002 1.20

September 30, 2001 1.20

September 30, 2000 1.50

September 30, 1999 1.60

September 30, 1998 1.10

September 30, 1997 0.90

September 30, 1996 0.90

5. Research and Development was $335M, or 16.50% of revenues. If you take out the $50M charge to R&D for the UMTS capitalization charge, you would have a ratio of 14% of revenues. At December 31, 2002 it was 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 believe that management intends on keeping the ratio in the 15% range.

The following table lists prior Research and Development to Sales Ratio :

September 30, 2003 16.50

September 30, 2002 18.75

September 30, 2001 16.53

September 30, 2000 11.00

September 30, 1999 13.10

September 30, 1998 15.05

September 30, 1997 11.54

September 30, 1996 11.59

6. Flow Ratio is 0.72. The Flow Ratio is desired to be less than 1.25. Here are the givens : Current Assets = $7,833, Cash = $4,507, Current Liabilities = $5,015 and Short Term Debt = $389.

The Flow ratio is similar to the Cash ratio, accept it includes a reduction of short term debt from current liabilities. It is similar to the Quick Ratio.

Flow Ratio = (CA - Cash) / (CL - STD) = 0.72. The ratio was 1.09 on December 31, 2002, 1.48 on December 31, 2001 , 2.85 at FYE2000 and 2.36 at FYE 1999. Interesting to notice an improvement in this ratio over the last few years. Since the industry and company are in a depression, I do not believe that definite relevance can be established. On the face, it does look like financial management is being optimized.

The following table lists prior Flow Ratios :

September 30, 2002 0.72

September 30, 2002 0.76

September 30, 2001 1.52

September 30, 2000 2.85

September 30, 1999 2.35

September 30, 1998 1.69

September 30, 1997 1.36

September 30, 1996 1.26

7. Total Asset Turnover Ratio is ( Sales/ Total Net Assets). Generally, the higher the multiple, the more efficient the company. The industry standard, which I have quickly , unofficially and haphazardly appears to be between 0.80 to 1.10. Like other ratios here, this is merely a ratio to watch.

The following table lists prior Total Asset Turnover Ratios :

September 30, 2003 0.54

September 30, 2002 0.69

September 30, 2001 0.63

September 30, 2000 0.61

September 30, 1999 0.76

September 30, 1998 0.83

September 30, 1997 1.16

September 30, 1996 0.70

8. Gross Margin (Cost of Sales/Sales).

The following table lists prior Gross Margin Percentages :

September 30, 2003 31.3%

September 30, 2002 12.6

September 30, 2001 15.3

September 30, 2000 40.5

September 30, 1999 48.0

September 30, 1998 46.9

September 30, 1997 44.5

September 30, 1996 41.4

9. Operating Margin Percentage ( Operating Income (loss)/Sales). I believe that Lucent's ultimate goal is a 10% to 15% margin.

The following table lists prior Operating Margin Percentage :

September 30, 2003 ( 0.03)

September 30, 2002 (54.40)

September 30, 2001 (90.50)

September 30, 2000 9.40

September 30, 1999 14.00

September 30, 1998 8.00

September 30, 1997 5.80

September 30, 1996 3.10

10. Net Profit Margin Percentage (Net Income (Loss)/Sales). I believe that Lucent's ultimate goal is a 10% margin.

The following table lists prior Net Profit Margin Percentage :

September 30, 2003 (13.70)

September 30, 2002 (96.98)

September 30, 2001 (76.20)

September 30, 2000 4.20

September 30, 1999 17.70

September 30, 1998 4.40

September 30, 1997 1.60

September 30, 1996 1.40

11. Return on Equity (ROE) formula is Net Income/Equity . There are more thorough ROE formulas, such as "The Dupont Formula", but for this, we will use the simple calculation.

The following table lists prior ROE :

September 30, 2003 N/A

September 30, 2002 N/A

September 30, 2001 N/A

September 30, 2000 6.10

September 30, 1999 44.30

September 30, 1998 19.20

September 30, 1997 14.80

September 30, 1996 10.90

12. Long Term Debt to Equity .

The following table lists prior Long Term Debt to Equity :

September 30, 2003 N/A

September 30, 2002 N/A

September 30, 2001 29.70

September 30, 2000 11.60

September 30, 1999 29.90

September 30, 1998 31.20

September 30, 1997 49.20

September 30, 1996 60.80

12. Times Interest Earned Ratio . This ratio measures the ability to meet interest payments. Formula is Earnings before Interest and Taxes (EBIT)/ Interest Expense. This is also referred to as the "Interest Coverage Ratio".

The following table lists prior Times Interest Earned Ratio :

September 30, 2003 (18.40)

September 30, 2002 (17.50)

September 30, 2001 (37.40)

September 30, 2000 7.90

September 30, 1999 13.00

September 30, 1998 14.40

September 30, 1997 7.10

September 30, 1996 2.70

13. Total Liabilities to Total Assets Ratio .

The following table lists prior Total Liabilities to Total Assets Ratio :

September 30, 2003 121.41

September 30, 2002 117.20

September 30, 2001 61.80

September 30, 2000 44.90

September 30, 1999 60.60

September 30, 1998 73.70

September 30, 1997 85.80

September 30, 1996 88.10

13. Total Liabilities to Total Assets Ratio .

The following table lists prior Total Liabilities to Total Assets Ratio :

September 30, 2003 121.41

September 30, 2002 117.20

September 30, 2001 61.80

September 30, 2000 44.90

September 30, 1999 60.60

September 30, 1998 73.70

September 30, 1997 85.80

September 30, 1996 88.10

13. Total Shares outstanding are 4,178M. Current market price is $2.50. Hence, market capitalization is $10,445M. Hence , the current Price to Sales multiple is 1.24X , using revenues of 8,470M. If we add Long Term debt of $4,439 to the $10,445M Market Capitalization, we get a total Enterprise Value (EV) of $14,884M. The EV in this case would be 1.76X.

14. Company was Free Cash Flow positive in quarter. Yet for F2003 , cash flow was negative by over $1.2B. This was not an unexpected number.

15. Company has more cash and equivalents on hand than they originally guided for during first half of fiscal year. Lucent expected to end the year with Cash and Equivalents of $2.5B. If we add the bond offering of $1.6B, we get $4.1B, whereas ending Cash and Equivalents were $4.5B.
BobbyMax 12/4/2012 | 11:19:24 PM
re: Lucent's Back in Black The annual revenues are less than $8 Billion. It has abandoned many lines of businesses. In spite of the fact that there are over 36,000 employees. But the products are not coming out fast enough. In fact, the company is trying to make a living on its very old products. Market shares are dwindling. No recovery is in sight.

It appears that Mrs. Russo and are not able to make Lucent employees very productive. They are all sitting around otherwise with over 36,000 employees we will see a lot more products.

The Lucent Board is not able to provide any guidance to the company. Almost all of them are non-tecnical persons. They just seek more renumeration and benefits. We need a different kind of board which is active, efficient and knowledgable.

The Lucent share holders have lost trillions of dollars, yet Lucent is not worried and the top employees are looting the company. Mrs. Russo has closed the doors and windows to Lucent.

The stock has come dowm from $78 per share to a little over $2.00 per share.

Since the board members derive tremendous benefits from Lucent, they are going to do any thing so that the copmpany becomes profitable again.
2bits 12/4/2012 | 11:19:22 PM
re: Lucent's Back in Black On the NM breakdown question, there's some interesting figures from Deutche Bank that come out from time to time. Here's the Q1 breakdown (estimated) of Lucent revenues:

% SalesSales
Q1 03Q1 03
Integrated Network Systems
Circuit Switching13.1%315.8
Professional Services10.4%249.0
WAN Switching 2.7%65.0
Messaging 1.9%45.0
Intell Network S/W1.9%45.0
Stinger DSLAM 2.7%65.0
Digital Loop Carrier1.7%40.0
Access Concentrators0.2%5.0
Programmable Switches1.0%25.0
Misc. OEM products0.8%20.0
Maintainence contracts0.0%0.0
Other software/service/legacy product
Metro / LH SDH1.5%35.0
Metro / LH SONET2.0%47.5
LH WDM 0.9%21.0
Metro WDM 0.3%6.7
Digital Cross-connects0.2%4.0
Other 0.3%7.5
Optical switch0.5%12.0
Total INS 42.6%1024

Mobility Solutions
Professional Services6.9%166.0
CDMA base stations28.6%688.2
TDMA base stations3.7%89.9
GSM base stations1.0%25.0
UMTS base stations0.0%0.0
Mobile Sw'g Center3.8%91.5
Software 4.2%99.9
SONET/SDH 1.7%40.0
WAN Switching 1.5%35.0
Messaging 1.0%25.0
Total Mobility 52.5%1260

Other 5.0%119.0

Total Lucent Revenues100.0%2,403
2bits 12/4/2012 | 11:19:22 PM
re: Lucent's Back in Black PS, apologies for the terrible formatting. That looked great when I hit "post" but awful now. :-(
BenGrahamMan 12/4/2012 | 11:19:18 PM
re: Lucent's Back in Black can you email me the proper formatted sheet to [email protected]

thanks if so, and cool if not

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