Pension Concerns Hit Lucent

It's not often that age concerns creep into telecom vendor quarterly conference calls, but the issue cropped up today as Lucent Technologies Inc. (NYSE: LU) announced its fourth-quarter and full-year numbers. (See Lucent Posts Q4.)

CFO Frank D'Amelio said the net pension credit Lucent is due in its current financial year -- fiscal 2006, which began on October 1 -- will be $100 million lower than previously anticipated mainly because Lucent's retirees are living too damn long!

Earlier this year, D'Amelio said the pension credit was due to be about $520 million in fiscal year 2006. Now that number is set to be $418 million -- and that's a hefty reduction from the $718 million credit Lucent realized in the financial year that ended September 30, 2005. (See Lucent Beats Estimates, Bets on IMS.)

The CFO has obviously been checking up with the National Center for Health Statistics. Its data shows that average life expectancy is creeping up each year, with the average U.S. citizen expected to live until he or she is nearly 78 years old, despite increasing obesity problems.

D'Amelio noted that other factors play a role in the pension credit returns, too, such as equity returns and interest rates. But there's no getting away from the fact that the credit will be "down dramatically," added the CFO on today's conference call.

That wasn't the only item raised by analysts. There were many references by D'Amelio and Lucent CEO Pat Russo to the company's success in the merging IMS (IP Multimedia Subsystem) sector, where the vendor has just scored some high-profile wins. "It's about being in the hearts and brains of customer networks," said Russo.

Lucent now has six announced customers and 43 trials with 13 different customers, says Russo. (See SBC Jumps on Lucent IMS Bandwagon and Cingular Picks Lucent for IMS.)

But management stressed it was still early days, and the CFO was forced to admit that "we're not anticipating any material revenues from IMS relative to our annual numbers" in the current financial year. So there will be some revenues, but not any worth noting.

Then there's the outlook for 2006. While Lucent is expecting annual revenues to grow "in the mid-single digits," gross margins are expected to be between 41 percent and 43 percent, lower than fiscal 2005's 44 percent.

While the company made a profit this year of $1.19 billion and exceeded earnings expectations in the fourth quarter -- 8 cents per share compared with the 5 cents analysts had been expecting -- Lucent's share price dipped slightly, by 4 cents to $3.07, in morning trading.

So what will Russo and her team do to counter the pension and margin pressures? Cut costs, naturally, by optimizing its supply chain and [ed. note: drumroll, please] reducing its headcount.

On September 30, Lucent had about 30,500 staff globally, but the company plans to make 2,000 staff redundant in the current financial year, with many of those cuts resulting from the convergence of its fixed and mobile divisions, and from shifting the vendor's OSS team into its Worldwide Services division. (See Lucent Converges, Jobs to Go.)

But Lucent will also hire about 1,000 new staff, in growth areas and outside the U.S., so it expects to have about 29,500 staff at September 30, 2006.

Those growth areas include next-generation optical (an area that showed an 8 percent growth in fiscal 2005), applications development, WiMax, 3G wireless, and fixed-line access, a sector in which Lucent has just unveiled its new "God box." (See Lucent Unveils Access God Box.)

— Ray Le Maistre, International News Editor, Light Reading