Lucent Bets on IMS

Lucent talks up IMS, but lack of clarity over the future sends the stock down

July 19, 2005

5 Min Read
Lucent Bets on IMS

IMS, future headcount reductions, and pension credits were the hot topics as Lucent Technologies Inc. (NYSE: LU) discussed its latest quarterly financials this morning (see Lucent Ups Revenue, Profit Falls).

But analysts and investors weren't too happy with what they heard on the vendor's conference call. Having crept up by 2 cents in pre-market trading (before the conference call), Lucent's share price fell by 10 cents, more than 3 percent, to $3.03 in early morning trading.

With the vendor's financials offering few surprises, much of today's earnings call was focused on the impact in the coming years of three things: potential revenues from IMS (IP Multimedia Subsystem), the converged services framework that's gripping the attention of carriers and vendors alike (see IMS Guide); the effect of the current reorganization in the Network Solutions Group, the combined fixed and wireless business unit announced in April (see Lucent Converges, Jobs to Go); and the expected fall in net income from pension credits expected in the coming years, something that has been worrying some analysts for months (see Lucent Numbers Raise Pension Question).

Here's what Lucent's bigwigs had to say.

IMS – the land grab
Lucent CEO Pat Russo says the IMS sector is a "footprint" game. "We need to be in trials, we need to be working with customers," she said. "It's a very complex space, as it's a reference architecture that covers many network elements, and these trials can last up to a year. We measure our progress by how engaged we are with potential customers, how many of our IMS elements are involved, and how many trials we're in."

Russo says Lucent is now in 50 trials with 14 customers, an increase from the second quarter, but "there's not much spending in this space at the moment...

"We have some revenues from products that are considered IMS elements, such as our super distributed HLR [home location register], but these aren't strictly IMS revenues. We won't see spending from customers deploying IMS on a mass scale until 2006 and 2007. But it's important to remember that IMS is about delivering applications that will drive traffic, and that in turn will drive further demand for network capacity."

Russo also noted that the shift towards IMS-based platforms would create "significant network integration requirements," and that her company's services division was ready to pounce on any such opportunities.

She said that acquisitions, as well as organic growth and partnerships, are possible, should Lucent need to expand its product set. "We're looking at all alternatives to grow our portfolio. Inorganic growth is an option." Russo cited the Telica acquisition as an example, as well as a partnership with WiMax vendor Alvarion Ltd. (Nasdaq: ALVR). (See Lucent Buys Softswitch Vendor Telica and Lucent to Resell Alvarion.)

Cutting costs, upping investment
Analysts are keen to quantify the potential cost-cutting potential of Lucent's Network Solutions Group, which is the combination of its wireless and wireline groups. But the vendor's management frustrated anyone hoping for details today.

Russo said operational efficiencies would be gained by "eliminating the duplication of duties" and developing common technical platforms, such as Ethernet cards that could be used in wireline and wireless equipment. But she added that, while that process is ongoing, the company is also pinpointing "high growth areas" within the company, such as high-speed fixed and mobile access and metro optical, that require investment. "We need to drive our growth engines," said Russo, as she fumbled for the clutch and second gear.

As a result of these "parallel initiatives," CFO Frank D’Amelio won't be able to talk about potential reductions in SG&A (sales, general, and administration) costs until Lucent reports its fourth quarter and gives guidance for fiscal 2006, though "we expect all of this to deliver improvement possibilities."

So, really, Lucent doesn't know how much its going to save. Yet.

Pension impact
Lucent may have posted another profit, but once again the company's pension credits accounted for more than half of the earnings. In the latest quarter, net pension credits were $178 million, about the same as the past two quarters.

But D'Amelio reminded analysts that, overall, the net pension credit for fiscal 2005, which closes September 30, will be down by about $150 million for the year, compared with the previous financial year's $868 million, putting the total at about $720 million for the current fiscal 12 months.

He also noted that this would shrink again in fiscal 2006, by a further $200 million or so, to around $520 million, or an average of $130 million per quarter.

The concern is that the cost-cutting initiatives in progress and future sales growth in areas such as IMS will not make up for the reduction in net pension credits and the negative impact of Lucent's shrinking wireline business. That's why investors and analysts are so keen to get a detailed analysis of the firm's cost reduction program, but now they'll have to wait at least another three months.

The latest numbers
There were few surprises in the vendor's third-quarter numbers. Lucent announced quarterly profits of $372 million, or 7 cents per share, from revenues of $2.34 billion, of which half came from wireless equipment sales.

The vendor cited strong 3G sales and growth in its services business, while Russo noted that the wireline business is "stabilizing," which, translated, means that increased sales of some lines, such as optical gear, are keeping the overall drop in fixed network sales to a minimum (see Lucent Expands MetroPCS, Lucent EV-DOs in Mexico, Lucent Expands Delta 450, and Lucent Expands Telecom NZ).

The revenues were in line with analysts' expectations of $2.36 billion, but earnings were ahead of the expected 4 cents per share. The 7 cents, though, included 2 cents from tax gains and bad debt recovery.

The profits were up from the second quarter but down from a year ago (see Lucent Posts Q2 Profit and Lucent Continues Down Profit Path).

Wireless revenues of $1.17 billion were down slightly from the second quarter, mainly due to the timing of network deployments, according to D'Amelio. Wireline sales at $592 million were flat sequentially but down 12 percent from a year earlier, while the Worldwide Services division recorded sales of $538 million, up sequentially and year-on-year.

— Ray Le Maistre, International News Editor, Light Reading

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