THE DAY AHEAD: Lucent leaves investors guessing

COMMENTARY -- Lucent Technologies (NYSE: LU) had a simple question to answer Monday night: Is the worst over? Millions of shareholders, roughly 125,000 employees and plenty of analysts were dying to know. Lucent's answer? Ask us three months from now.

And there's the conundrum surrounding Lucent and the few investors brave enough to bottom fish. Some investors may have been thinking it was turnaround time after Lucent booted CEO Richard McGinn, who was at the helm while shares fell to a three-year low.

But there's no indication that the worst is over for Lucent. You may think that Lucent shares have bottomed out, but there are no guarantees. If you jump in and buy Lucent, you hope and pray for a rebound. Management wasn't exactly soothing. Lucent is asking investors to trust a company that issues profit warnings almost monthly. Given Lucent's recent track record, your best bet may be to stay on the sidelines.

For the record, Lucent topped reduced estimates for its fiscal fourth quarter, but who cares? When you lower estimates a bunch of times, upside surprises lose their luster.

Lucent gave guidance for its fiscal first quarter ending Dec. 31, but the rest of the year is a mystery. Pro forma revenue from continuing operations will fall about 7 percent from a year ago and earnings will be break even, well below consensus forecasts. Lucent expects sequential improvement in each quarter of 2001.

"As you would expect, we have forecasts for the rest of the year, but we felt that it was not wise to go any further than the first quarter," said Henry Schacht, who replaced McGinn. Schacht said he wanted more time to review the projections.

On the positive side, Schacht and CFO Debby Hopkins talked a good turnaround game. Management is re-evaluating Lucent's operations and its product portfolio and plans to beef up research and development. Hopkins said 2001 will be a rebuilding year, but didn't offer specifics on what investors should use to grade Lucent. As for that massive restructuring charge on deck, officials were mum. Hopkins said Lucent was "taking apart the business to build it back up."

Lucent, which is betting it can show some progress in the March quarter, lost $2 billion in revenue because of two customers, one domestic and one international, in its first quarter, said Hopkins. The implication was that Lucent's numbers weren't as bad as they looked once you excluded the two customers. Analysts didn't buy it.

So how do you grade Lucent going forward? Here are a few talking points:

The CEO search -- Schacht said he would make sharp, quick decisions to turn the company around. Meanwhile, a search for his successor is under way. Schacht's ideal candidate will understand the industry, operations and the product cycles. The wild card is whether Lucent can attract a big-name CEO from the likes of Nortel (NYSE: NT) or Cisco (Nasdaq: CSCO). Lucent needs someone to rally the troops -- the company is turning over 20 percent of its work force a quarter.

Investor relations -- Never underestimate the perception game when it comes to Wall Street. McGinn botched the IR game by toning down expectations a little at a time and praying things would turn around. Release the bad news, get it all out at once and move on. In the perception game, it's a good thing that Lucent isn't floating its outlook for the rest of fiscal 2001. Few folks would believe Lucent at this point anyway. By being vague, management is resetting future expectations for Lucent.

The restructuring -- Lucent is tearing down the business to build it back up, but there are a lot of moving parts. Wait until you see some solid details before getting too enthusiastic.

Financing -- A major point to consider. Lucent financed a lot of its customers to buy gear. Now many telco carriers, especially competitive local exchange carriers, have financial problems and Lucent could get shackled with bad loans. McGinn took big risks with loans to boost sales. In future quarters, Lucent will look more like a banker. Hopkins said Lucent boosted its outstanding loans by $300 million and will be aggressive much like a commercial lender would. Although it's risky, Lucent reckons it can package loans and monetize them.

Products -- The initial concept behind the 1996 AT&T spinoff was that Bell Labs would cook up cool gear and Lucent would sell it. Lucent missed a generation of fiber optic gear, and Nortel ran away with the market. Lucent's new OC192 optical transport product still lags Nortel, and sales are waning. Until Lucent cooks up some new equipment and gains market share, the jury is out -- at least until January. TDAIN

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