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Lucent tumbles on profit warning, revenue shenanigans

Larry Dignan
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Larry Dignan
4 min read

Lucent Technologies (NYSE: LU) saved its worst profit warning for last. Lucent said Thursday it will post a fiscal first quarter loss of 25 cents a share to 30 cents a share. The company also restated its fourth quarter results because of revenue recognition shenanigans and said it would restructure to save $1 billion.

Wall Street was expecting a loss of a penny a share for the quarter ending Dec. 31, according to First Call Corp. Sales for the quarter will fall to about $6.3 billion, down about 20 percent compared to a year ago.

Shares fell more than 18 percent, or 2.87, to a 52-week low of 12.67 in early trading. "Although shares have already experienced significant declines, we expect additional negative pressure," said B. Alexander Henderson, an analyst with Salomon Smith Barney.

In October, the telecommunications equipment provider said it expected sales to drop 7 percent compared to a year ago. Lucent said it doesn't expect year-over-year growth in fiscal 2001, but sales will begin to grow sequentially in the second quarter.

Lucent's latest profit warning marked the fourth time the company cut expectations for the first quarter. The company cut first quarter expectations in October after it ousted CEO Richard McGinn.

In addition to the first quarter profit warning, Lucent restated its fourth quarter results. The company indicated that it would restate results last month. Following a review, Lucent said its fourth quarter sales were $8.7 billion, down from the previously reported number of $9.4 billion. Pro forma earnings for the fourth quarter are now 10 cents a share, down from the previously reported figure of 18 cents a share.

For the year ending Sept. 30, Lucent said it reported a profit of 93 cents a share from continuing operations on sales of $33.6 billion.

Returning to his fourth quarter refrain, CEO Henry Schacht said fiscal 2001 will be a "rebuilding year." Lucent said it expects to grow at or above market rates in 2002.

"Today's the day to lay out all the bad news and put it behind us," said Schacht on an analyst conference call. "We have serious execution issues. We know went wrong and are confident the problems are fixable."

Revenue recognition vs. Wall Street's rat race

Schacht said the company's attempt to meet lofty growth expectations led the company to focus on quarterly revenue gains at the expense of long-term goals. Schacht, who has been CEO for 10 weeks, said the company offered discounts to customers so they could buy equipment earlier than they would have otherwise. The discounts pumped up quarterly results, but left sales gaps in following quarters.

"We're going to get away from this total commitment to quarter-to-quarter growth that mortgaged the future," said Schacht. "We're looking to build sustainable profits."

Lucent's quarter-to-quarter sprint worked until the capital dried up for customers. The company was whacked by a soft competitive local exchange carrier (CLEC) market, a slowdown in capital spending by established service providers, lower software sales and tighter vendor financing.

"We tried to grow the company faster than it was able to," said Schacht. "The problems were compounded by business processing systems that were stretched beyond their capacity."

In November, Lucent said it found $125 million in revenue irregularities and started a review. In a sign of just how bad Lucent's internal controls have become, the company reported $679 million in revenue irregularities. Lucent's review highlighted a lot of problems:

  • In the first case, which shaved $125 million off of Lucent's top line, there was "misleading documentation and incomplete communications between a sales team and the financial organization with respect to offering a customer credits in connection with a software license." The move was made with disregard for Lucent's revenue recognition rules, the company said. One employee was fired and "appropriate disciplinary action" was taken.

  • In two cases, Lucent sales teams verbally offered credits to be used at a later date that may have been related to fourth quarter sales. Lucent will reflect the credits in the fourth quarter, cutting revenue by $74 million.

  • Lucent found revenue had been recognized from the sale of a system that had been incompletely shipped. That move cut fourth quarter revenue by $28 million.

  • The company took back $452 million in equipment that had been sold to systems integrators and distributors, but not passed on to customers because of financial woes. Lucent said it was taking back the gear to preserve the customer relationships and noted that "verbal agreements" indicated the company would take back the equipment. That snafu led to a $452 million fourth quarter revenue cut.

    Layoffs on deck

    Lucent said the company's problems were magnified by an unwieldy cost structure. To cut costs, Lucent said it will streamline operations, cut its portfolio, and announce layoffs.

    The restructuring plan -- and the charge that'll go with it -- was being finalized, the company said. Lucent said it will cut jobs as it consolidates corporate and marketing functions, streamlines sales, and eliminates products. Officials said Lucent will continue to recruit and retain technical workers.

    Schacht said the company will expedite the restructuring by giving key executives more responsibility. Among the notable changes, CFO Deborah Hopkins will be in charge of Lucent's information systems group to tie the company's information and financial systems together. Bill O'Shea, executive vice president, will come up with a strategy for the company's next-generation Internet products. O'Shea's role will be vital, considering Lucent missed a generation with its fiber-optic products and lost ground to Nortel (NYSE: NT) and other rivals.

    When Lucent announces its first quarter earnings in late January, it will detail charges, the company said. Schacht didn't rule out further restructuring moves in 2001.


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