Lucent warns on one quarter, restates another

Lucent Stock price from December 1999 to present.

Source: Prophet Finance

Lucent said Thursday that it will post a fiscal first-quarter loss of between 25 cents a share and 30 cents a share. The company also restated its fourth-quarter results after citing accounting errors and said it will restructure to save $1 billion.

Wall Street had expected a loss of a penny a share for the company's first quarter, ending Dec. 31, according to First Call/Thomson Financial. Lucent said that sales for the quarter will fall 20 percent compared with a year ago. In October, Lucent said it expected sales to drop 7 percent compared with a year ago.

At 1 p.m. PT, the close of regular trading, shares were down $1.31, or 8 percent, to $14.19. Earlier in the day, shares hit a new 52-week low of $12.19. "Although shares have already experienced significant declines, we expect additional negative pressure," said B. Alexander Henderson, an analyst with Salomon Smith Barney.

Lucent's latest profit warning marked the fourth time the company has cut expectations for the first quarter. The Murray Hill, N.J.-based company cut first-quarter expectations in October after it ousted chief executive 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. After a review, Lucent said its fourth-quarter sales were $8.7 billion, down from the previously reported $9.4 billion. Pro forma earnings for the fourth quarter are now 10 cents a share, down from the previously reported 18 cents a share.

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

Returning to his fourth-quarter refrain, new CEO Henry Schacht said fiscal 2001 will be a "rebuilding year."

"Today's the day to lay out all the bad news and put it behind us," Schacht said during a conference call with analysts Thursday. "We have serious execution issues. We know (what) 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 Lucent 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 otherwise would have. The discounts pumped up quarterly results but left sales gaps in later quarters.

"We're going to get away from this total commitment to quarter-to-quarter growth that mortgaged the future," Schacht said. "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," Schacht said. "The problems were compounded by business processing systems that were stretched beyond their capacity."

Lucent's revenue recognition woes
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's review highlighted a lot of problems:

• In the first case, which shaved $125 million off 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 issue 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 will go with it--is being finalized, the company said. Lucent said it will cut jobs as it consolidates corporate and marketing functions, streamlines sales, and eliminates products. Representatives 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, chief financial officer 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 Networks 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.