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Lucent tries to appease fears about its future

One month after posting its first earnings shortfall, the networking firm's chief executive explains to shareholders the company's first missteps.

OAKLAND, Calif.--Lucent Technologies is facing the music, attempting to explain the first missteps in its short life as an independent company.

One month after posting its first earnings shortfall, Lucent chief executive Richard McGinn met with shareholders today to appease fears about the company's future. Lucent's woes are striking given the runaway success of entrenched competitors such as Cisco Systems and Nortel Networks, as well as continued growth from a variety of start-ups in the networking equipment industry.

Investors have shied away from Lucent's stock after the company missed first-quarter earnings by 18 cents per share and reported a $1 billion drop in sales, well below Wall Street analysts' estimates. Since then, Lucent's shares have tumbled 24 percent, from $69 to its current $52.50.

"We are not used to falling short of your expectations," McGinn told a crowd of about 700 people at its annual shareholders meeting here. "We are committed to regaining that momentum, not by what we say, but by how we perform by the remainder of fiscal 2000."

By contrast, competitors such as Cisco recently reported that earnings jumped 49 percent while Nortel's shot up 40 percent--with their resulting stock performance reflecting their success.

Hoping to ease shareholder's concerns, McGinn today insisted the company is fixing the problems that caused the revenue shortfall, considered by analysts as the most significant issue the company has faced since spinning off from AT&T in 1996.

Lucent blamed the poor quarter on the company's inability to meet their service provider customers' demand for optical networking equipment, lower software sales and delays in purchases by other service providers. "What happened in the first quarter was not a market issue. For us it was an execution issue," McGinn said.

The company plans to increase the amount of optical networking equipment its manufacturing plants make, and is hiring 290 technicians to build optical-based networks for customers. Lucent expects to meet demand for optical networking equipment by the end of the current quarter in March, and will release 18 previously announced optical products by the end of June, he said.

The company next week will also announce plans for higher-speed optical networking products to compete head to head with Nortel.

McGinn admitted that Lucent was slow to respond to the need for higher-speed optical networking equipment, allowing Nortel to take an early lead in the lucrative market.

"We stumbled. We gave them an opening and they drove a huge truck through it," he said. "They have a lead?and it's our job to take (it) over."

The admission is significant given the insatiable demand for fiber-optic-based equipment from the likes of Qwest Communications and Global Crossing, among others.

McGinn said the company is making moves beyond optical networking. The company plans to ship 20 new communications software products and services by year's end; focus on sales outside the United States; and cut costs internally to save money, he said.

"We had 15 successive quarters of beating expectations in Wall Street. We want to start that streak all over again," McGinn told shareholders.

Executives from Cisco and Nortel remain respectful of the firm's market presence, though they can't help but enjoy the struggles Lucent is going through.

"For the first time in history, Nortel is valued higher than Lucent," said Nortel chief executive John Roth, whose company's market value of $169 billion is $3 billion higher than Lucent's. "I don't know how long that will last, but it feels good."

Cisco's John Chambers noted on the company's recent quarterly earnings call that while Nortel is "stepping up to the plate very well," Lucent has fallen off in accounts where the two companies are competing for business.

During the shareholder's meeting, one participant from Sacramento, Calif., said he was upset over the performance of Lucent's stock, which has stayed fairly static since April, after a 2-for-1 split.

"My main concern is the bottom line. The stock has dropped and hasn't come back up," said the shareholder, who declined to be named. "I don't want to hear about supplies. You should have had the supplies. You should have forecasted that. I'm disappointed in your performance."

McGinn responded by saying he expects Lucent's revenue will increase 17 percent next quarter. He also reminded the investor that the company's shares have increased about 800 percent since the company went public four years ago.

Another stockholder remained focused on the long-term opportunities in the networking industry. "Lucent is a long-term play and I have confidence in the company. They are in all the right markets," said Al Ness, a Lucent shareholder who lives in Lake Tahoe, Nev.

Many financial analysts, however, are leery of Lucent's stock and are taking a wait-and-see attitude.

"I wouldn't be stepping in to buy the stock" right now, said Martin Pyykkonen, equities analyst with CIBC Oppenheimer.

"When you look at the sheer numbers, there are other investment opportunities besides Lucent," said analyst David Toung of Argus Research, who has downgraded Lucent from "buy" to "hold." "Lucent investors can sit tight and wait for it to come back. But in this market, a lot can happen in three to six months. Stocks can double in that time."

News.com's Ben Heskett contributed to this report.