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Lucent's Revenue, Losses Shrink

As expected, Lucent Technologies Inc. (NYSE: LU) posted another quarterly loss, as revenues slipped to their lowest levels ever on weak North American and wireless sales (see Lucent Q3 Revenues Slide). Losses were not as steep as the prior quarter and the company made moves to shore up its cash position, but long-term debt increased.

For the fiscal third quarter of 2003, Lucent posted revenues of $1.96 billion, an 18 percent decline from last quarter’s $2.4 billion. A year ago, the company reported $2.95 billion in revenue. But the company greatly reduced its losses from a year ago. For the quarter it lost $254 million, or $0.07 a share, compared with a loss of $8.03 billion, or $2.35, a year ago. Analysts surveyed by Thomson First Call had anticipated a loss of $0.06 per share.

Aside from the revenue shortfall, the company stabilized some areas of business, as its Integrated Network Solutions (INS) division grew slightly and margins on service sales increased.

As of the end of the quarter, Lucent had $4.9 billion in cash and short-term investments, representing an increase of about $1.5 billion from the prior the quarter. The increase came from $1.6 billion raised through a public offering of convertible senior debt.

But the convertible offering also meant that debt grew. The company now has $4.7 billion in long term debt, that's up from $3.17 billion in the prior quarter, and its total liabilities still outstrip its total assets by $3 billion, according to the company's posted balance sheet.

Despite the high levels of debt, some analysts are comfortable the company can still turn things around and get back to profitability.

“They’ve kept their nose to the grindstone, and the cost reductions are starting to work,” says Steven Levy, an analyst with Lehman Brothers. “It’s a shame. If they had gotten the revenue they expected, I think a lot of people would have been surprised at how close they came to breakeven.”

The company prepped the market last week when chairman and CEO Pat Russo announced it was expecting this revenue shortfall and that it wouldn't attain profitable results until fiscal 2004, pushing back its schedule of breakeven (see Lucent Punts 2003 Profit Pledge). Previously, the company stated that it would reach a breakeven level by the end of 2003 based on $2.4 billion in sales.

So what happened? Frank D’Amelio, executive vice president and CFO said that most of the shortfall was due to two wireless carriers failing to accept products (see Lucent at a Loss Over Reliance?). Russo would not name specific names, but she mentioned that one of the carrier customers in question was international and the other was domestic. Many in the industry believe Reliance Infocomm Ltd. in India is the international customer and Verizon Wireless the domestic.

Russo emphasized on the conference call with analysts that it’s not a question of if this revenue will ever be recognized, but more a matter of when. Consistent with previous quarters, she did not provide guidance for the next quarter.

“There are lots of things that need to come together for network acceptance when deploying gear in large networks over broad geographic areas,” she said. “There are lots of steps and processing of paperwork. There’s nothing more magical about what happened than that.”

Brushing the bad news to the side, Russo quickly focused on some positive aspects of the third quarter.

“Clearly, the revenue profile was a disappointment,” she said. “But as you peel back the numbers in other areas, you’ll see that we continue to make progress on improving fundamentals, and we remain committed to getting to profitability as quickly as possible.”

She noted that business in the INS division has finally stabilized. Sales in this organization grew by $39 million in the quarter. North American sales, especially in the U.S., continued to be weak, but sales in Europe were strong. Russo said the company is continuing to build relationships in Europe and hopes to leverage partnerships there to win more business.

She also provided more color on the partnership announced earlier in the quarter with Juniper Networks Inc. (Nasdaq: JNPR) (see Lucent Partners With Juniper). While it is still in its early days, she said the company has already won two deals that have not yet been announced, which include products from Juniper’s portfolio.

Revenue from the services business increased during the quarter. Gross margins on services increased to 20 percent from about 12.5 percent in the previous quarter.

Russo seemed confident that the wireless division will grow and contribute positively to revenues in the future, despite weak performance in the third quarter. She emphasized the recently announced $1 billion wireless contract with Sprint PCS (NYSE: PCS) as a good indication that the wireless division is moving forward (see Lucent Wins $1B Sprint 3G Deal).

Even with all of Russo’s positive spin, investors seem unimpressed. In midday trading, the company’s stock was down $0.12 (6.28%) to $1.74.

— Marguerite Reardon, Senior Editor, Light Reading

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