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Lucent to slash 10,000 jobs, cut expenses more deeply

The telecom equipment maker unveils the first installment of a restructuring plan designed to save $2 billion in costs, taking a hefty charge in its second fiscal quarter.

4 min read
Lucent Technologies on Wednesday unveiled the first installment of its restructuring plan designed to save $2 billion in costs.

The struggling telecommunications equipment provider is laying off 10,000 workers, cutting 6,000 additional jobs, and said it would take a hefty charge in its second fiscal quarter.

As expected, Lucent on Wednesday morning outlined a seven-point restructuring plan and said it could cut its expenses by $2 billion, twice the amount it forecast in December.

As part of the plan, Lucent will cut 10,000 jobs through layoffs and attrition. The majority of affected employees will be notified between now and Feb. 15. By early March, all employees will know their fate, the company said.

To fix its problems, Lucent said it will outsource manufacturing to contract manufacturers, or companies that make end products. Contract equipment manufacturers are used heavily by Lucent rivals Nortel and Cisco. On a conference call with analysts, Lucent CEO Henry Schacht said the company will close two facilities, eliminating an additional 6,000 jobs by the end of the year.

A Lucent spokeswoman said most of the 6,000 employees affected by the outsourcing will "follow" their jobs to the contract manufacturers.

Lucent also said it will appoint an executive to oversee the restructuring and will use outside consultants to "accelerate the effort." In addition, the company will cut capital spending while boosting its cash reserves with a new $4.5 billion credit line.

"The real key here is that Lucent is taking its medicine," said Eric Buck, an analyst with Wasserstein Perella Securities. "Now they have to follow through and create better business practices."

Investors applauded Lucent's move. Shares of Lucent were up $1.25, or 6 percent, to $20.06 in early trading.

The restructuring won't come cheap. Lucent said it will take a charge in its fiscal second quarter in the range of $1.2 billion to $1.6 billion.

Although the restructuring will be painful, the Murray Hill, N.J., company needs the change. Lucent reported a first-quarter loss from continuing operations of $1.02 billion, or 30 cents a share, on sales of $5.84 billion. The results fell short of already lowered targets. First Call projected a loss of 27 cents a share on sales of $6.58 billion.

In the year-earlier quarter, Lucent reported earnings from continuing operations of $1.08 billion, or 33 cents a share, on sales of $8.07 billion. CFO Deborah Hopkins said Lucent fell short on sales because the company "walked away from end-of-year bargain deals."

Analysts said Lucent's earnings miss should be put in perspective. "The first quarter is probably the bottom from a financial perspective," said Gregory Geiling, an analyst at J.P. Morgan Chase. "The big issues are organizational. It'll be six to 12 months to see the effect of organizational changes. It's still early."

A silver lining?
Perhaps the best news about Lucent's quarter is that it's finally over, putting to bed an ugly period. The company, which used to be a Wall Street favorite, lowered expectations for the first quarter four times. It restated its fourth-quarter results, warned about its first quarter, and detailed a host of internal problems last month.

Lucent fell behind Nortel and Cisco, but its internal controls weren't built for speed. To meet quarters, Lucent managers fudged numbers to give the appearance of strong growth. Amid all the turmoil, Lucent ousted CEO Richard McGinn and lost credibility on Wall Street.

Now 2001 is considered a rebuilding year. In a statement, Schacht didn't rule out additional restructuring moves.

However, analysts cautioned that the company has to be careful not to cut into muscle. "Lucent has to make sure it doesn't cut costs at the expense of getting products to market," Buck said.

Schacht said Lucent has streamlined its product development. "I think our product development process is much improved," he said.

Buck maintains a "buy" rating on the stock. Eighteen analysts rate Lucent a "buy," and 17 call it a "hold."

Buck's "buy" rating is based on valuation and likely sequential improvement. However, Schacht declined to get specific about growth rates for the second quarter. "We expect sequential improvement on the top line and sequential improvement on the bottom line," Schacht said. "That's the best guidance we can give at this time."

He also said the bottom-line effects of Lucent's restructuring won't be seen until the second half.

Other analysts weren't so fast to predict a Lucent rebound. "This is a necessary first step, but I want to see how quickly the top line improves," said Lawrence Harris, an analyst with Josephthal.