Will Lucent spinoff grow at Internet speeds?

As struggling Lucent Technologies sheds units to bolster its networking equipment business, analysts wonder whether daughter company Avaya Communication will be able to go it alone.

3 min read
As struggling Lucent Technologies sheds units to bolster its networking equipment business, analysts wonder whether daughter company Avaya will be able to go it alone.

Lucent will officially spin off its $7.4 billion corporate networking unit, christened Avaya, next week. The spinoff is part of a larger restructuring plan that will allow Lucent to focus on building high-end networking and wireless equipment for telecommunications carriers and Internet service providers (ISPs).

The networking company has also put forth plans to shed its lucrative chipmaking and fiber-optics component businesses. The strategy is one of necessity, following several disappointing quarters in which the company missed earnings estimates and warned of weaker profits ahead.

Avaya sells phone systems and software to help businesses field customer service queries. Its main competitors are some of the largest networking companies currently in the market: Nortel Networks, Cisco Systems, Germany's Siemens and France's Alcatel.

Aside from stiff competition, Avaya's main challenge is proving to Wall Street that it can show revenue growth in an industry that Lucent executives have previously characterized as slow-growing. Analysts maintain that the company's success hinges on its ability to find new markets.

"The question is, can Avaya grow?" said Argus Research analyst David Toung. "People are aware Lucent is essentially spinning off a mature business. The market is looking for growth, so they have to show growth."

Toung said that companies such as young Sycamore Networks, Juniper Networks, Ciena and other high-flying networking companies have enthralled investors with soaring revenue growth. Wall Street pundits will be looking for similar growth from Avaya, he added.

Avaya executives will discuss the company's strategy in a press conference Wednesday. They intend to focus on several emerging markets, including Internet-based phone systems that can save businesses money, as such technology streams phone calls over the public Internet.

Avaya will also offer Internet-based customer service software, such as unified messaging, which allows employees to check voice mail, email and faxes over a single device. Avaya was one of the early players in the unified messaging market, building up a solid customer base following Lucent's acquisition of Octel in 1997.

The company also plans to offer virtual private network devices, hardware that gives businesses inexpensive and secure high-speed connections to corporate networks over the Web.

Karyn Mashima, Avaya's vice president of strategy and technology, said the company is confident of growth in these new, popular networking areas.

"We have a very good installed base of customers, but we're taking our profits and reinvesting it in the high-growth areas," she said.

Morgan Stanley Dean Witter analyst George Kelly echoed the company's confidence, saying that with about 980,000 existing customers, Avaya has a good shot at succeeding despite stiff competition. He predicts the company's net income will grow from $142 million this fiscal year to $409 million in 2001 and $548 million in 2002.

Kelly expects company revenue will reach $7.4 billion in the 2000 fiscal year, with revenue growing nine percent to $8.1 billion in 2001.

Avaya, which is in the midst of a $50 million advertising campaign to get its new name out, will start trading as a stand-alone company on the New York Stock Exchange on Monday under the ticker symbol "AV." Lucent shareholders will receive one share of Avaya for every 12 Lucent shares they own.

Analyst firm Morgan Stanley Dean Witter predicts Avaya's stock will be worth between $21 to $24, giving the new company a market value of between $6.5 billion to $7.5 billion. Lucent's stock is currently trading at $31.

Analysts said the new company has a good, experienced management team, led by chief executive Don Peterson, who was previously Lucent's chief financial officer.