Can Lucent recover from missteps?

Lucent executives yesterday announced that the company will concentrate on selling high-speed Net access and wireless equipment to telecommunications carriers and Internet service providers as the company realigned its corporate structure and revealed another executive departure.

The announcement marked the latest restructuring move by the giant telecommunications equipment maker, which suffered an earnings shortfall earlier this year and has warned of weaker profits ahead. Lucent has struggled and seen its stock price fall by nearly half, while its competitors in the networking equipment industry--Cisco Systems, Nortel Networks and start-ups--have enjoyed booming growth.

"The bottom line is Lucent continues to fight its heritage of being a voice behemoth," said Cahners In-Stat Group analyst Laurie Gooding. "It takes longer for a company with a voice heritage to reinvent itself and address (the Internet)."

To turn the company around, Lucent in recent months has shrunk itself, choosing to focus solely on the fast-growing service provider market. The company is spinning off its slow-growing corporate networking business and is in the midst of a similar move with its lucrative chipmaking and fiber-optic component business.

Because of the spinoffs, chief executive Richard McGinn said this week that the company is combining its service provider networking business with its corporate operations and is seeking a chief operating officer, a position that has been vacant since last fall.

McGinn also said that Patricia Russo, executive vice president and chief executive of Lucent's service provider business, has left the company, a week after Harry Bosco, head of its optical equipment unit, left as well.

Analysts say Lucent is making the right moves to turn the company's fortunes around.

"It's too soon to tell, but they're the logical steps," said analyst Martin Pyykkonen of CIBC World Markets. "The measuring stick is the December quarter and whether they show some signs that they can reaccelerate revenue growth, that these changes are paying off."

Placing the blame
In January, Lucent blamed its first-quarter earnings shortfall on the company's inability to meet its service provider customers' demand for optical networking equipment, lower software sales, and delays in purchases by other service providers.

Lucent executives at the time said Lucent was too slow to respond to the need for higher-speed optical equipment, allowing Nortel to take an early lead in the exploding market. Optical equipment allows service providers to send larger amounts of Net traffic across their networks at faster speeds.

After working to correct the problems by increasing manufacturing of optical equipment and announcing new products, Lucent rebounded the next two quarters by reporting better-than-expected profits.

But the company in July warned of weaker growth in the forthcoming fourth quarter. Lucent executives blamed a faster-than-expected decline in the company's older voice equipment, which is not expected to be offset as quickly by the introduction of newer Internet-based products, such as optical and wireless equipment.

Lucent hopes a new chief operating officer will help correct the problems and ease the company's transition from older voice technologies to more Internet-based products, a company spokesman said.

"Lucent's product portfolio is not as well positioned (as competitors')," Pyykkonen said. "It is a $40 billion company, and 50 percent of its revenue comes from older product areas, so it takes a long time to turn the aircraft around and up to speed."

Analysts say the spinoffs are a smart move for the company: The corporate networking business is growing slowly, and the optical components business as a separate company will increase shareholder value. Other companies in the same market have excelled on Wall Street, such as Broadcom, now priced at $242, and JDS Uniphase, priced at $119.

Wall Street analysts are giving Lucent a wait-and-see attitude and rating the stock as "hold" and "outperform." Lucent's shares have fallen from $74.44 in early March to $40.

But Paul Sagawa, an analyst at Sanford C. Bernstein, believes Lucent will get back on track soon.

"They simply need to reduce the volatility of their quarters, which they're trying to do," Sagawa said. "The demand for Lucent products remains good. And their position with their key customers remains good. The company is well positioned in the long run."