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Profit warning hits Lucent stock hard

The phone equipment maker picks up two points after dropping 17 in after-hours trading.

Lucent Technologies picked up two points this morning after dropping 17 in after-hours trading.

Merrill Lynch today lowered its intermediate term rating for Lucent to "neutral" but maintained a long-term "buy."

Lucent's stock tumbled 28 percent yesterday after the telephone equipment maker warned that its first-quarter earnings will fall short of expectations.

Lucent's shares dropped 3.56 points yesterday to close at 69.06 as 17.2 million shares exchanged hands. The stock fell again in after-hours trading to 52.

For the quarter ended Dec. 31, the company expects to earn between 36 cents to 39 cents per share. A consensus of Wall Street analysts had predicted earnings of 54 cents per share, according to First Call.

Lucent executives expect to report first-quarter sales of $9.8 billion to $9.9 billion, far below the $11 billion in revenue analysts had expected. Lucent also warned that second-quarter revenue will only grow 12 to 15 percent, below the 18 to 22 percent growth analysts expected.

"One billion dollars is a hell of a lot of money to be off," said analyst Michael Davies of Gruntal. "Right now it's going to be tough for them going forward. This quarter is going to be tough and next quarter is not going to be as good. "This is going to send a chill through the tech sector," Davies added.

Merrill Lynch analyst Michael Ching said three factors accounted for Lucent's surprise shortfall: a faster-than-expected shift to newer optical products Lucent could not deliver in adequate supply; service providers buying software evenly throughout the year rather than making large purchases in December; and flat growth in wireless infrastructure sales, which is a significant drop from the 26 percent growth a year ago.

Ching estimates Lucent will see lingering effects through March and warned profit margins could be four to five points below original expectations.

Lucent's profit warning is the latest evidence of fragile times in the technology business. PC maker Gateway and management software firm BMC Software yesterday issued earnings warnings too. (See related story.) All three announcements come amid an unsettling week for the stock market.

But rival Nortel Networks issued a press release in the aftermath of Lucent's disclosure, saying it's on track to meet Wall Street expectations when it reports fourth-quarter revenue in late January. "We remain extremely positive on our outlook for 2000 given the continued momentum across our high-performance Internet portfolio," Nortel chief executive John Roth said in a statement.

Merrill Lynch, which said Lucent's problem is singular and not industry wide, concluded that Nortel's lead delivering big bandwidth solutions may be greater than previously forecast. Nortel is apparently better positioned to deliver newer 80-160 channel WDM optical systems. The inability to get these systems to customers contributed as much as $400 million of Lucent's shortfall, Ching concluded.

A Lucent spokeswoman acknowledged the shortfall was caused in part by the company's inability to meet customer demand for optical networking equipment, lower software sales and Year 2000 concerns.