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Wireless Buoys Lucent

Light Reading
LR Mobile News Analysis
Light Reading
10/20/2004

Lucent Technologies Inc. (NYSE: LU) logged a profitable fourth quarter, but more importantly, the company increased its revenues, maintained profits, and logged its first profitable fiscal year since 2000.

Net income for fiscal year 2004 was $1.14 billion, or 25 cents per share, compared to a net loss of $770 million or 29 cents per diluted share for fiscal 2003.

“I have to tell you I feel very good about what we’ve achieved this year,” said Lucent chairwoman and CEO Patricia Russo on this morning's company conference call. She cited growth in areas such as wireless infrastructure, VOIP, emerging markets, and government services as driving Lucent's financial recovery.

Despite the news of profitability, however, some analysts continued to raise questions about the company's share of profits from pension credits and also had questions about a sequential decline in gross margins.

Trading on the news, Lucent shares bounced around in the morning, before trading up $0.03 (0.89%) to $3.41 at midday.

For the fourth fiscal quarter of 2004, ending Sept. 30, Lucent reported net income of $348 million, or 7 cents per share, in accordance with generally accepted accounting principles (GAAP). These results compare with net income of $387 million or 8 cents per share in the third quarter of fiscal 2004 and net income of $99 million or 2 cents per diluted share in the year-ago quarter.

The company reported revenues of $2.40 billion in the quarter, an increase of 10 percent sequentially and an increase of 19 percent from the year-ago quarter.

Lucent reported annual revenues of $9.05 billion for fiscal year 2004, an increase of 7 percent from the $8.47 billion it reported in fiscal 2003.

The company’s earnings also benefited from special items, including the revaluation of stock warrants that are expected to be “issued as part of Lucent's global settlement of shareowner litigation and bad debt and financing recoveries,” according to the company. This more than offset a special charge related to its acquistion of Telica Inc..

Russo cited growth in mobility services, as well as government services and emerging markets, as opportunities that Lucent would focus on in the future. She said these are the areas in which Lucent sees the most potential for growth.

Russo also sees the convergence of wireline and wireless technologies as an ongoing trend, saying Lucent was working on a common packet-based platform for both infrastructures, which it's calling the IP Multimedia Subsystem architecture (IMS)

"The distinction between wireline and mobility will continue to blur," said Russo.

On the sales side, Lucent officials said the bulk of growth came from the mobility sector, where Russo said the company is benefiting from the mobile service providers’ move toward 3G networks.

Revenues in Lucent’s Mobility unit were $1.11 billion in the fiscal fourth quarter, an increase of 13 percent sequentially and 75 percent compared with the year-ago quarter. For fiscal year 2004, revenues for the Mobility division were $4.01 billion, an increase of 30 percent from fiscal year 2003.

Lucent officials continue to point to Lucent’s $5 billion contract with Verizon Wireless as a huge win. That contract will include the deployment of 3G CDMA and EVDO services.

Revenue also appeared to stabilize in Lucent’s Integrated Network Services division, which has been shrinking for some time. Lucent reported INS of $741 million in the fiscal fourth quarter, an increase of 4 percent sequentially but a decrease of 14 percent compared with the year-ago quarter. For fiscal year 2004, INS revenues were $2.98 billion, a decrease of 10 percent from fiscal year 2003.

In the wireline market, Russo said, Lucent is focusing on growth areas in next-generation products while revenue for legacy circuit switching products continues to shrink. "Many of the wireline markets are in transition. There will be a crossover point as next-generation investment takes off."

In Lucent’s Worldwide Service unit, revenues for the fourth quarter of fiscal 2004 were $514 million, an increase of 9 percent sequentially and as compared with the year-ago quarter. For fiscal year 2004, LWS revenues were $1.93 billion, an increase of 5 percent from fiscal year 2003.

Some other items coming in Lucent’s fourth-quarter numbers:

  • Operating expenses slightly up. Despite news of continue layoffs and outsourcing moves (see Lucent Offshoring Wave Hits Hard), Lucent’s operating expenses for the fourth quarter of fiscal 2004 actually increased to $691 million, compared with $598 million for the third quarter of fiscal 2004. For the fiscal year, operating expenses were $2.56 billion as compared with $2.87 billion for fiscal year 2003.

  • Sequential gross margins slipped. For the fourth quarter of fiscal 2004, reported gross margins were 41 percent of revenues, compared with 43 percent in the third quarter of fiscal 2004. For the fiscal year, gross margin was 42 percent of revenues, compared with 31 percent for fiscal year 2003. Lucent CFO Frank D'Amelio attributed this to a "less favorable product mix," but said this was expected to improve in the future. He expects Lucent to maintain gross margins in the "low-to-mid 40s."

  • Boost in cash stash. Lucent reported $4.87 billion in cash and marketable securities, an increase of $178 million from the previous quarter.
One recurring question about Lucent's results popped up after the conference call: What's happening with Lucent's pension credits? Some analysts pointed to the fact that a large portion of Lucent's reported pro forma results came from unusually large pension credits.

"Once again this quarter, the gross pension credit of $280mn was the main component in the proforma operating profit of $273mn," wrote Merrill Lynch & Co. Inc. analyst Tal Liani in a note to clients following the call. "We continue to rate the Company a Neutral as we think that any operational improvement in the next few quarters and years will hardly offset the expected decline in the pension credit."

Concerns that Lucent's pension credits will eventually decline, thus putting pressue on profitability, have persisted (see Lucent Numbers Raise Pension Question). Pension credits come from changes in the the value of Lucent's pension fund, which isn't used in the company's core business.

CFO D'Amelio said the pension credit has been driven by the reduction in retiree health benefits. In 2005, he said, he expects the credit to decline by $200 million.

Lucent officials said that, looking ahead, the company expects revenues to increase in the "mid-single" digits, and "ahead of the average market growth rate."

— R. Scott Raynovich, US Editor, Light Reading

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