Calling the current market "unprecedented" and "like flying a 747 through a storm and trying to change engines at the same time," Lucent CEO Patricia Russo told analysts on a conference call that Lucent is cutting expenses and taking other steps to meet further revenue sinkage in 2003. "We're planning down about 20 percent over 2002," she said.
Lucent's hacking away at both people and products. In addition to reducing staff to 35,000 by the end of fiscal 2003, it's aiming for a lower-than-ever breakeven point of $2.5 billion or less. Execs hope the new target will result in positive cash flow by mid-2003. Near-term, there's a price to pay: The company is taking more charges than expected this quarter, resulting in a pro forma loss of about $0.65 per share.
The news fuels ongoing questions about Lucent's product line and what it might keep or throw out. In today's call, execs declined to offer much detail, saying information about the specific segments targeted for cuts, as well as financial modeling and other forecast clarifications, will be presented with the company's quarterly report on October 23.
But Russo made it clear that whatever won't benefit Lucent in the near term will be shunted aside. Where the market for a product is unclear or benefits aren't projected to emerge for more than 24 months, the purse strings are closed.
Just what that means remains to be seen. But on the "keep" side, Russo reiterated Lucent's interest in "optical, circuit, and packet switching; mobility; and network operations," and cited a new strategic focus on services.
She said Lucent's picked several focus areas in the services market, including professional services like task optimization, outsourcing of work that customers now do in house, and multivendor equipment support. The company is exploring what it needs to address these service areas, and Russo says Lucent expects to see these businesses grow.
At least one analyst says it's not clear whether Lucent's focus on services will mean a reduction in its emphasis on products. "Lucent's been reasonably successful with its services," says Tom Nolle, president of consultancy CIMI Corp. But he says that with limited resources, it's going to have to pick a spot. Ultimately, it might not be a bad idea for Lucent to cast itself as a kind of mega-integrator, he says. The reason, Nolle asserts, is that the so-called legacy products in which Lucent enjoys a large market share, such as circuit-switching voice equipment, have a limited outlook. But Lucent may not be able to risk spending big bucks to replace them. Alternative: Dig in wherever revenue looks likeliest, and wait for a market turnaround.
So where might Lucent cut next? Here's how the list is shaping up:
- ATM gear One source, who asked not to be named, says the company has an internal deadline this month regarding what to do with its line of older ATM multiservice switches, including the GX 550, which Lucent acquired through its purchase of Ascend Communications. But Nolle thinks it would be inadvisable for Lucent to cut products like the 550 without replacing them first. And while Lucent has a high-end ATM switch, the TMX 880 (see Lucent Unveils Core Switch), that MPLS-based products isn't marketed as a 550 replacement.
- Softswitches There's been speculation that Lucent may pull the plug on its softswitching products, considering the dire straits that market is in (see Softswitches Head for a Shakeout). In many ways, this fits the bill of a segment in which immediate benefits may not be forthcoming for Lucent.
- Wireless router Lucent may jettison the services router it bought with Springtide, sources say (see Springtide Ebbing Away?). This may open the gates for some interesting partnerships.
For now, Lucent isn't saying anything more than this. The majority of cuts will be done as quickly as possible, according to CFO Frank D'Amelio. He said reductions would happen throughout "all product areas and geographies" and take place, most likely, before the end of this year.
Lucent took other steps today as well. It's canceled its untouched $1.5 billion credit facility in order to avoid any warrants or penalties that might emerge before the facility expires in February 2003.
On the upside, Lucent says it has about $4.4 billion in cash and marketable securities and plans to exit 2003 with more than $2 billion, without drawing on any new credit.
At press time, Lucent shares were holding unchanged at $0.70.
— Mary Jander, Senior Editor, Light Reading