As the numbers were expected, Lucent's stock was static at $2.08 today, giving the soon-to-be-swallowed vendor a $9.32 billion market capitalization. (See Lucatel Clears Euro Hurdle.)
BIFF! Our CDMA equipment rocks, and makes GSM gear look like a limp weed.
KERPOW!! The fourth quarter is shaping up to be a doozy.
THWACK!!! Our IMS engagements are going great no matter what anyone says.
Okay, so those may not have been her exact words, but read on to hear what Russo had to say as she defended her corner following a slump in revenues, profits, and margins.
Wireless blip
As previously noted, the third quarter's numbers were hammered by a dramatic drop in wireless equipment revenues, which, at $827 million, were down $175 million, or 17 percent, from the second quarter's $1 billion, and down 30 percent from a year earlier.
This, it seems, has led some people to speculate that the CDMA infrastructure market, which generates the vast majority of Lucent's wireless revenues, might be heading down the flusher. After all, GSM dominates the world, with about 86 percent of the world's roughly 2.32 billion mobile subscribers connected to a GSM network. (See GSM Hits 2B Users.)
Russo says the CDMA infrastructure market will be worth more than $8 billion in 2006, and will remain steady and probably gain slightly in the coming years. So there are plenty of opportunities in developing markets such as India and in developed markets such as the U.S., where the latest technology upgrade -- CDMA2000 1xEV-DO Rev A -- can provide high-end data services. (See CDMA Carriers Upgrade .)
She also pointed out that plans by Brazilian CDMA carrier and Lucent customer Vivo Participacoes SA to build an overlay GSM network was not a threat to CDMA market development. It's just a sensible move, said Russo, as Vivo can mop up low-end customers with cheap GSM handsets while targeting sophisticated users with the EV-DO services, and she noted "the inability of GSM to deliver VOIP and other high-end services." (See VIVO Expands.)
And for the killer punch in wireless, "the negative speculation about the CDMA market as related to Lucent is unwarranted."
Fourth-quarter growth
So the third-quarter numbers "are not indicative of the opportunities we see globally," said Russo. That statement was backed up with the repeated statement, first made earlier this month, that the current fourth quarter would, in revenue terms, be the biggest quarter of the financial year by some ways, if the Revision A deployments and the UMTS wireless build-out at Cingular Wireless go as expected.
When pressed, the Lucent team wouldn't elaborate on what that revenue number might be. So far, Lucent's biggest quarter of the fiscal year was the second quarter's $2.14 billion. The current analyst consensus for the fourth quarter is for revenues of $2.46 billion and earnings of 4 cents per share, though Citigroup analyst Alex Henderson is planning for a 13 percent sequential rise in revenues to about $2.32 billion.
"We are not having any problems with trials or deployments. This is a very lengthy and complex process… There's a lot of integration work. It's a critical place to be. It's important to be at the table as other services are planned, where we can pull in our services and optical portfolio."
The IMS business is still small but it's growing, said Russo, who reiterated that Lucent doesn't expect to see any significant revenues from its IMS portfolio until late 2006 and into 2007. She noted that in addition to the nine announced IMS engagements, Lucent has a further 19 ongoing.
"We have nine announced IMS customers, and we're feeling good about the trials and confident we can turn them into contracts. We're accelerating development and expect to see growth in IMS and applications opportunities."
Russo also gave a plug for Riverstone's Ethernet equipment, saying that, along with the Imagenio IPTV delivery system Lucent is now developing for Telefónica SA (NYSE: TEF) and others, it has "greatly enhanced our end-to-end video solution... We expect to see growth as IPTV rolls out." (See Lucent to Spend $207M for Riverstone and Lucent, Telefonica Team on IPTV.)
re: Lucent's Russo: Don't Panic! Russo fails, at least in public, to recognise the very dramatic negative news around CDMA the latest weeks. But hey, she has always been the queen of BS and missed forecasts, and she still got to be the figurehead of the new Lucatel...
Ericsson, the leading systems vendor, and Nokia, the leading handset vendor, has already pulled out of CDMA. On the crucial growth markets Brazil and India, the biggest operators have just decided to start migrating from CDMA to GSM/WCDMA. The same thing is happening in Korea and Australia. Soon, Sprint will be the only major operator left, and they too are debating the future of their wireless network. The Chinese might continue buying some for good relations with the US, but can Sprint + 15% of the Chinese market suffice to keep this technology afloat? I don't think so.
For Nortel and Lucent, this is a nightmare. Wireless is the most important segment on the market, and they have nothing in GSM/WCDMA. Forget about fixed line, the growth and volumes are in wireless. Being the market leader in CDMA in 2006 is equal to being the market leader of ATM in 1999.
EV-DO, VoIP, software upgrades, whatever. Everyone knows the bread and butter of wireless equipment sales is in the base stations, and the sales of those are driven by end customer growth. Since the CDMA handsets are too expensive for emerging markets, and the selection of handsets is puny (and shrinking), the operators have to shift to GSM. Issues like spectrum efficiency, release dates for various data upgrades etc, are all quite irrelevant in the bigger picture. If the handsets are twice the price, you won't get the end customers. This has already happened in India and Brazil, where the CDMA operators have lost market share dramatically the last 6 months. Hence their decision to switch.
"Vivo can mop up low-end customers with cheap GSM handsets while targeting sophisticated users with the EV-DO services". Replace GSM with IP and EV-DO with ATM, hear any bells ringing? What were the two major equipment vendors who stuck with ATM and ignored IP?
Generally good post but you failed to mention the largest CDMA network in the world - Verizon Wireless.
The second largest is China Unicom. It will be interesting to see if CDMA makes the 3G cut in China (if they ever pull the trigger on 3G) as I'm not sure it makes sense to have 3 standards. UMTS is a lock and if TD-SCDMA makes it out of the lab then CDMA could be left out.
re: Lucent's Russo: Don't Panic! AN $8 billion a year market is worth being in -- the concerns are that operators won't choose CDMA as the starting point any more and that existing CDMA operators will migrate away to GSM over time.
WIth the world so GSM-oriented there are a lot more handsets, terminals etc which makes it cheaper for carriers and subscribers.
I think there muts have been some suggestions that CDMA is already in its death throes, and that Lucent's revenues were going to mirror Q3 going forward. Russo and Co say not, as we can see.
re: Lucent's Russo: Don't Panic! Interesting theory - the death of CDMA. If it is like the ATM analogy - it won't die quickly. There is still a lot of money being made with ATM gear. Look at all those new ATM switches for UMTS roll-outs. IP, Ethernet and MPLS are the future but it takes a LONG time to get rid of the past. If CDMA dies - it will be a long, drawn out, painful death, especially with VZW pushing the train. I don't think you can associate a 1 quarter drop in wireless to the death of CDMA.
re: Lucent's Russo: Don't Panic! "I think there muts have been some suggestions that CDMA is already in its death throes, and that Lucent's revenues were going to mirror Q3 going forward. Russo and Co say not, as we can see."
Of course, the CDMA subsscribers won't migrate over night. However, the implications for Lucent and Nortel will be felt much more quickly, and I argue that they are already feeling the impact.
The first thing a carrier does when deciding to migrate to another network, is to stop investing in the legacy network. This means that even if there is some end customer growth in CDMA, the investments could drop by anything from 50 to 90 %.
There are many similarities with the IP/ATM battle: * Lucent and Nortel were probably the two major vendors that stuck with ATM way too long. Now they are the two main CDMA vendors. * The argument that "they will use GSM for volumes and cheap services, and CDMA for advanced users" imitates the ATM line of defense around 1999. The truth is, as any operator knows, that longterm there is no justification for keeping parallel networks doing pretty much the same. GSM/GPRS/EDGE can provide similar services as CDMA etc, just as an IP core can do essentially the same as an ATM core. Once the GSM buildout has started, so has the beginning of the end for CDMA.
Of course, Lucent and Nortel should not stop selling CDMA gear, it's still a big market - much bigger than all of their wireline business, for one. It's just that CDMA business is close to half of Lucents revenue, and there is nothing new to compensate the impending loss.
(IMS? Yeah, right. A few servers, maybe a 1-2B market in a couple of years, to share with the others)
re: Lucent's Russo: Don't Panic! On their call, LU management also noted that CDMA is more IP-friendly than GSM, making it ideal for higher-bandwidth services. As I recally, GSM is a narrowband TDM-like technology, while CDMA is packet all the way.
In the MOT call, management went out of their way to say they were "bearish on WCDMA" and bullish on UMTS, which they admitted (at the time) they had little exposure to.
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