Is the worst over for Lucent?

The financially besieged company has given Wall Street indications that there may be light at the end of the tunnel, but some analysts wonder if the worst is yet to come.

5 min read
Lucent Technologies has given Wall Street indications that there may be light at the end of the tunnel for the financially besieged company, but some analysts wonder if the worst is yet to come.

After a year marked by a series of financial gaffes, Lucent executives have spent the past few months performing a massive makeover of a company that was once the darling of Wall Street investors.

Those moves were highlighted by the company's successful yet frenetic efforts to gain $4.5 billion in new loans this week. As part of the loans, however, Lucent must limit its losses to $2.35 billion during the rest of the fiscal year, ending Sept. 30. The company also promised to earn at least $2.2 billion during the 2002 fiscal year--the first solid guidance the company has given in some time.

Executives from the embattled telecommunications equipment maker say they now have a plan in place to turn the company around. But since the company surprised Wall Street with a handful of profit warnings in the past year, financial analysts are more gun-shy about its prospects.

"Is the worst over? It's too early to say," said analyst Seth Spalding, of Epoch Partners, a financial research firm. "Everyone recognizes that the worst is over for the stock price. But there's no catalyst to buy it. It's too early to say what the impact is on the restructuring they're undergoing."

Gartner analyst Tim Smith says companies like Lucent must find efficient operating models that allow adequate financial performance while affording enough breathing room to develop for the future.

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A year of troubles
The past calendar year has been the most brutal for Lucent since it spun off from AT&T in 1996. Its stock has fallen from a 52-week high of $75.38 to its current price of about $11.50. Among the setbacks:

 After beating Wall Street expectations for 15 straight quarters, Lucent last January missed first-quarter earnings by 18 cents per share and reported a $1 billion drop in sales.

 The company in July reported better-than-expected third-quarter earnings, but warned of slower revenue growth for the rest of the fiscal year because of declining sales of its traditional voice products.

 The Lucent board of directors ousted Chief Executive Rich McGinn in October after the company missed its fourth-quarter earnings and cut its fiscal first-quarter outlook. The company, now led by acting Chief Executive Henry Schacht, announced plans to integrate its sales and professional services organizations as part of a reorganization.

 Lucent in December cut earnings expectations again for the first quarter. It also restated its fourth-quarter earnings, reducing revenue by $700 million after executives discovered an accounting error.

 Schacht in late January of this year announced a major restructuring to involve the laying off 10,000 employees and the outsourcing of manufacturing to contract manufacturers. The restructuring is designed to save the company $2 billion in costs.

 Lucent in February secured $4.5 billion in loans to fund its business and avoid the potential reduction in its credit rating to junk status.

Additionally, Lucent is currently mulling offers for its fiber-optic cabling business in hopes of reaping a multi-billion dollar windfall in order to help stabilize its finances while shedding what it perceives as a tangential business. Both Corning and JDS Uniphase are among those interested in the Lucent division, according to reports.

"Until we see signs that Lucent has fundamentally bottomed out, we continue to recommend that investors...stay on the sidelines and look for other ways to play the telecom equipment market," Lehman Brothers analyst Steven Levy said in a recent report.

During the past year,

Stock price from March 2000 to present.  

Source: Prophet Finance
Lucent has been hit hard by a faster-than-expected decline in the sale of its traditional voice equipment and slow sales of its newer Internet-based products, such as optical networking equipment.

Competitors edge in
Lucent executives said the main reason for the company's problems was that it was too slow to respond to the need for higher-speed optical equipment, allowing Nortel Networks 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. The company has since corrected the problems by increasing manufacturing of optical equipment.

In its reorganizations during the past year, Lucent has shrunk itself, choosing to focus solely on the faster-growing service provider market. The company spun off Avaya, its slow-growing corporate networking business, and is set to spin off Agere, its lucrative chipmaking and fiber-optic component business, this spring. The company is also rumored to be looking to sell other parts of its business, such as its fiber-optic cabling business.

Though Lucent's financial fortunes rapidly declined in the past year, analysts predict it's going to take much longer for the company to get back on track. Epoch Partners' Spalding believes it will take two years.

"It will take a year to put the ball in place and ducks lined up right, and the following year to see the recovery," he said.

Lehman Brothers' Levy doesn't expect Lucent to post a profit until the June 2002 quarter and recently lowered his revenue forecast for Lucent for the sixth time in the past year.

Levy, who rates Lucent's stock as a market perform, now expects the company to lose 67 cents per share this fiscal year, with revenue falling 24 percent to $25.6 billion. He previously expected a loss of 50 cents per share on revenue of $30.7 billion.

Economy not helping
Like struggling 3Com, which announced a profit warning Wednesday, Lucent's turnaround efforts will be hampered by the slowing U.S. economy and sluggish sales to telecommunications service providers.

Many emerging carriers, such as DSL (digital subscriber line) service providers, have struggled financially, which has slowed their spending for networking equipment. None of the major networking hardware makers have been immune. Nortel recently slashed revenue projections for the upcoming quarter, and Cisco Systems announced it would have flat sales growth sequentially for the next two quarters.

While some analysts question whether it's smart for Lucent to spin off the profitable Agere, analysts say investor interest in the impending initial public offering has helped prevent Lucent's stock from plummeting further. The IPO will also help Lucent reduce its debts by about $5 billion, Levy said. He believes Agere's stock is worth $9, while Lucent's stock is worth $6.

It's too soon to know whether Lucent has bottomed out and is on the road to recovery, but SG Cowen Securities analyst Michael Jung said the company's moves are a good first step. The $4.5 billion in bank loans Lucent recently received will help the company carry out its plans, he said.

"It gives them breathing room to do what they need to do, but their challenges are not over yet," he said. "They have to turn their business around and tackle their larger issues."