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Lucent Follows Profit Path

Lucent Technologies Inc. (NYSE: LU) has beaten profit estimates for its third fiscal quarter and says it expects to be profitable for the full fiscal year 2004, its first profitable full year since 2000.

Although Lucent’s still not growing -- it logged revenues of $2.19 billion in the quarter, the same as its second quarter -- it did improve its financial position by generating positive cash flow, increasing its cash and marketable securities by $100 million overall.

For its third fiscal quarter of 2004, Lucent reported GAAP net income of $387 million, or 8 cents per share. Analysts had expected net income of 2 cents per share, according to Reuters.

Those numbers compare with net income of $68 million, or 2 cents per diluted share, in the second quarter of fiscal 2004 and a net loss of $254 million, or 7 cents per diluted share, for the third quarter of 2003.

Most importantly, Lucent improved its cash flow, which has been a recent concern, despite the return of profits. Lucent attributed the profit primarily to gains in operating results. This alleviates some of the concern about it taking profits through one-time gains such as stock sales and pension benefits, as it did in the first fiscal quarter (see Lucent Punched Post Profit, China, Wireless Save Lucent , and Another LU-LU).

Meanwhile, CEO Pat Russo struck an upbeat note on the expansion of next-generation packet networks, as she proselytized Lucent’s move into selling converged data and voice services over a variety of networks.

“We’re clearly seeing an interest in converged services regardless of the access vehicle,” said Russo. “It is increasingly clear that we are on the cusp of the next generation of ubiquitous networking… The resulting architectures are starting to catch up with the concept of the ultimate convergence of networks.” Growth, however, did not cross all product lines. The only growth that Lucent demonstrated was in its Mobility division, which reported revenues of $986 million, an increase of 4 percent sequentially and 58 percent compared with the year-ago quarter.

“We’re a leader in CDMA. There’s clearly strength in that market -- we don’t see that falling off,” said Russo, noting that deployments in emerging markets such as Pakistan, Vietnam, China, and Russia contributed to growth. “Mobility is going to continue to have good opportunities, and we’re well positioned there.

The news was not as good in Lucent’s Integrated Network Solutions group. INS revenues for the third quarter of fiscal 2004 were $715 million, a decrease of 3 percent sequentially and a decrease of 12 percent compared with the year-ago quarter. “The decline last year was driven by timing of a few customers… We believe quarterly revenues will rebound,” said Russo.

Russo said she expects that optical revenues will return to levels of last year, which were slightly better. In this regard, she cited yesterday’s announced deal with Verizon Communications Inc. (NYSE: VZ) to purchase the LambdaXtreme long-haul optical product (see Lucent Lands Lambdas at Verizon).

”We feel good about our market progress in optical,” she said.

In Lucent’s Worldwide Services business, revenues for the third quarter of fiscal 2004 were $473 million, a decrease of 1 percent sequentially and an increase of 5 percent compared with the year-ago quarter. Russo said the business has changed as Lucent has pursued what it calls “higher margin” services, which include “professional services, maintenance, and managed services.”

Executive vice president and CFO Frank D’Amelio said that inventories grew during the quarter, but that was due to the accumulation of product for a few select customers. He expects inventory levels to decline in the next quarter.

“We do not believe the increase in inventory is due to market softness,” he said.

Some other details from the Lucent quarter:

  • Lucent’s Days Sales Outstanding (DSOs), a measure of the sales cycle, decreased from 65 to 63 days.
  • Headcount declined slightly to 32,300.
  • Lucent ended the quarter with cash and marketable securities worth $4.7 billion. But it also still holds total debt and convertible securities of $6.2 billion.
  • Gross margin for the quarter was 43 percent of revenues, which was the same as the gross margin rate for the second quarter of fiscal 2004.
  • Operating expenses for the third quarter of fiscal 2004 were $598 million, compared with $623 million for the second quarter of fiscal 2004.
— R. Scott Raynovich, US Editor, Light Reading

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