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Lucent Cuts 2006 Outlook

Lucent Technologies Inc. (NYSE: LU) saw its share price lose 10 percent of its value in pre-market trading this morning as the company warned that revenues in its 2006 fiscal year, which runs to September 30, will "be essentially flat or increase in the low-single digits for the year" instead of the previous predictions of mid-single digit growth. (See Lucent Revises 2006 View.)

Lucent achieved revenues of $9.44 billion in its 2005 financial year. Analysts, on average, had been expecting 2006 revenues to hit $9.96 billion, a year-on-year increase of 5.5 percent.

The news hit the wires at 7am Eastern. Shortly after, the vendor's share price had dropped 27 cents, 10 percent, to $2.44 in pre-market trading. It closed Thursday trading at $2.71.

The news will come as a blow to investors and analysts who had heard the mid-single digit growth figure for 2006 revenues reiterated on a number of conference calls during 2005, including as recently as last October. (See Pension Concerns Hit Lucent.)

In its statement, Lucent said it expects revenues for the first quarter of fiscal 2006, which ended December 31 2005, to be about $2.05 billion. That's down from $2.43 billion in the previous quarterly period, and way below average analyst expectations of $2.44 billion. The company blames lower than expected sales in the U.S. and China for the shortfall, adding that it expects sales in the second half of the year to be higher than in the first six months.

"As a result of the first-quarter performance and a review of our expectations for the remainder of the year, we believe it is prudent to change our full-year revenue guidance at this time," said Lucent CEO Patricia Russo in a prepared statement.

"While we are clearly disappointed, we consider this to be a temporary setback to the progress we have made, and we are confident that our performance will be much stronger for the remainder of the year," she said, before adding a namecheck for the role of the IMS (IP Multimedia Subsystem) framework for next generation networks, an area where Lucent has had some high profile marketing success in the past year. (See Lucent Takes IMS to China, Cingular Picks Lucent for IMS, SBC Picks Lucent IMS, and Lucent Lands BellSouth IMS Deal.)

Lucent will report its first quarter financials in full on January 24.

Lucent's announcement may not come as such a big shock to some. In a research note issued only four weeks ago, analysts at Lehman Brothers noted that while Lucent generates significant revenues, it relies heavily on several key customers, particularly Verizon Communications Inc. (NYSE: VZ) and Verizon Wireless in the U.S., which, combined, accounted for 27 percent of total revenues in fiscal year 2004. The analysts named Sprint Corp. (NYSE: S) as another major revenue contributor.

Lucent also announced today that it's seeking a new CFO, as the incumbent numbers man, Frank D'Amelio, has been named as the vendor's Chief Operating Officer (COO). D'Amelio will continue as CFO until a replacement is found. (See Lucent Names D'Amelio COO.)

Lucent isn't the only major North American telecom vendor facing significant challenges in 2006. (See Nortel's New Faces Face Tough Task.)

— Ray Le Maistre, International News Editor, Light Reading

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digits 12/5/2012 | 4:09:26 AM
re: Lucent Cuts 2006 Outlook Will 2006 be plagued by admisisons that things aren't going as well as predicted? Or is this a coincidental blip from two of the industry's biggest companies?
blueshoes 12/5/2012 | 4:09:24 AM
re: Lucent Cuts 2006 Outlook ray

how is it that **everything** you post on this board is a question - do you not have any opinions of your own? I cannot remember the last time you actually made a statement that had an idea in it. It is all questions for the posters.
Stevery 12/5/2012 | 4:09:24 AM
re: Lucent Cuts 2006 Outlook board who needs to name a new Non-AT&T sourced CEO

I believe that several high-profile names took themselves out of the running during the last search.

I doubt you'd find a different result this time.
digits 12/5/2012 | 4:09:24 AM
re: Lucent Cuts 2006 Outlook Blueshoes - here are two more:

Is soliciting the opinion of the readership -- people who work and invest in the industry and use the services -- not to your taste?

Have you seen the other areas of the site where Light Reading's writers publish their opinions?
Maverick1 12/5/2012 | 4:09:24 AM
re: Lucent Cuts 2006 Outlook LU's issue is one of not providing core product VALUE to customers and share value to shareholders. IMS MARKETING PRESS notwithstanding, LU is not a leader in most markets. It has been relatively easy for management to this point as they had swing room with headcount to reduce, retirement benefits to cut, real estate to reduce, and pension credits to play with, etc. Little focus on the sweeping product changes/reductions/commitments that are required. Their markets are very NA focused, and COMPETITION is fierce, driven by sharp people. Unfortunately, they will continue to cut people (many of whom are just the ones they shouldn't cut but aren't "connected"; multiple examples of "the connected" saved layoff after layoff further reducing shareholder value) instead of a board who needs to name a new Non-AT&T sourced CEO. Let someone like Jack Welch, former GE make the hard decisions. That is what is needed to truly restore shareholder trust and value. Unfortunately, the insider board can't do that and senior management would just quiver with that thought as they'd all be history in a heartbeat. I believe LU must first cut their portfolio to a profitable bone and then merge with a complementary partner for shareholders to get anything out of what's left.
paolo.franzoi 12/5/2012 | 4:09:23 AM
re: Lucent Cuts 2006 Outlook
Nice one Ray.

I think that there is this concept that a rising tide raises all boats going on. I think Lucent shows that this is not true. The growth markets of today are very narrowly targeted. If you are not participating in them, then are not in a growth mode. This is a very different situation than 10 years ago (before the 96 Telecom Act). Unfortunately, this makes predictions about the future highly non-linear. Analysts in particular are really good at linear extrapolations. Conversely, they are awful in non-linear extrapolations. The days of next year looking like this year are gone for now. Interesting that you did not count UT Starcomm's troubles in with this group.

As to hiring a new Lucent CEO, why choose a big name. They need a new culture and the board needs to support it. But a name is not required.

seven
blueshoes 12/5/2012 | 4:09:23 AM
re: Lucent Cuts 2006 Outlook >is soliciting the opinion of the readership -- people who work and invest in the industry and use the services -- not to your taste?

yes, fine, but for gods sake, you must have one original opinion in your head. since I have been looking on the board I haven't seen one yet - just questions - to be answered by people, so of whom (as I am undoubtedly) considerably less qualified than you to judge market dynamics.

digits 12/5/2012 | 4:09:23 AM
re: Lucent Cuts 2006 Outlook Well, I referenced NT because of the historical similarity with Lucent -- in my opinion, comparing LU to UTSI is like comparing a King Prawn to a tuna fish - they're on the same menu but very, very different.

I agree with what you say about the pace of change -- it must be incredibly hard for very large companies with tens of thousands of staff and seemingly endless product lines to shift quickly enough. It looks like Zafirovski is trying to get things moving quickly at Nortel - I'm sure he'd like some of his old Moto buddies in there too as well, but he'll hav eto wait to poach them.

NOt only is it tough for these guys to move quickly, it must be almost impossible to predict, in advance, revenue projections during a period of unheralded new competition and tech shift. Clearly the D'AMelio and crew need to be more conservative -- it might impact the stock short term but it won't give them the credibility issues they'll be facing now.

If I offer any more opinions, I will be classified as an analyst, and I couldn't afford to fund my lavish lifestyle on the salary those guys get. OK?
paolo.franzoi 12/5/2012 | 4:09:22 AM
re: Lucent Cuts 2006 Outlook
Understood Ray. The only thing that I see is that China was the savior of CapEx. For any company that has LOTS of business in China and was on that much of a roll to slide, should send some warning signals.

By the way, I think your questions are intended to focus the discussion on the important issues raised by the article. This, of course, is a form of opinion and analysis.

seven
Mark Sebastyn 12/5/2012 | 4:09:22 AM
re: Lucent Cuts 2006 Outlook Lucent has been using large pension credits to boost it's operating results for the last several years. Before pension credits Lucent made $212MM in FY2005, after adding in the pension credit they made $1.185B.

From the 2005 10-K

"Approximately two-thirds of (pension credits) are allocated to operating expenses, with the balance in costs used to determine gross margin. The allocation is based on a recent comparison of salaries that are related to costs and those that are related to operating expenses. Refer to our GÇ£Consolidated Results of OperationsGÇ¥ section of this MD&A for a further discussion of changes in the net pension credit and the related impact on our results."

You need to back these figures out of the income statement to see reality.

Full analysis including link to WSJ article here. http://www.nyquistcapital.com/...
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