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Lucent warns earnings will miss estimates

Lucent Technologies' financial woes continue as the telecommunications equipment maker says it expects next quarter's profits will be lower than expected.

    Lucent Technologies' financial woes continued Tuesday as the telecommunications equipment maker said it expects next quarter's profits will be lower than expected.

    In after-hours trading, at 4:40 p.m. PT, Lucent's stock plummeted $7.25, from $31.38 to $24.13, according to the Island ECN Web site.

    Lucent expects to earn between 17 cents and 18 cents per share, compared with 24 cents a share for the same quarter a year ago. Analysts had expected earnings of 27 cents a share, according to First Call/Thomson Financial. The company said it will report fourth-quarter earnings Oct. 24.

    Lucent executives said the earnings warning is due to lower-than-expected revenue from its optical networking business and a decline in the sale of traditional voice products, as well as potential bad loans to emerging service provider customers.

    Chief executive Rich McGinn said in a conference call with financial analysts that the company continues to explore ways to restructure and cut costs. Efforts include consolidating its corporate structure, reviewing its product portfolio, and installing a new customer order management system that could save the company money.

    "It is clear there must be a major retooling of the Lucent business...The problems will not be fixed in one quarter, but they're fixable," said McGinn, who has been under fire after a rocky financial year.

    The chief executive's detractors may grow louder with Lucent's latest earnings warning. In recent months, some Wall Street analysts have speculated that McGinn may be in the hot seat. Today's announcement marks the second warning Lucent has issued for its fourth-quarter performance and follows a poor first-quarter showing, when the company missed estimates.

    Lucent's woes also prompted a downturn in the price of rival networking stocks. Cisco Systems' stock fell $2.56 to $51.13 during regular trading hours, then dipped $1.69 in after-hours trading. Nortel Networks, whose stock dropped $3.25 to $60 in regular trading hours, fell 6 cents in after-hours trading.

    Lucent executives said the company expects to report fourth-quarter revenue of between $9.3 billion and $9.4 billion for the quarter, a 14 percent to 15 percent increase over the same quarter last year. The company in July had predicted a 15 percent revenue increase.

    The company, which suffered an earnings shortfall earlier this year, has been in the middle of a major restructuring.

    To turn the company around, Lucent in recent months has shrunk itself, choosing to focus solely on the fast-growing service provider market. The company spun off Avaya, its slow-growing corporate networking business, and is in the middle of a similar move with its lucrative chipmaking and fiber-optic component business.

    In January, Lucent blamed its first-quarter earnings shortfall on the company's inability to meet its service provider customers' demands for optical networking equipment, lower software sales, and delays in purchases by other service providers.

    Lucent executives at the time said the company was too slow to respond to the need for higher-speed optical equipment, allowing Nortel 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.

    After working to correct the problems by increasing manufacturing of optical equipment and announcing new products, Lucent rebounded the next two quarters by reporting better-than-expected profits.

    But the company in July warned of weaker growth in the fourth quarter. Lucent executives blamed a faster-than-expected decline in the company's older voice equipment, which is not expected to be offset as quickly by the introduction of newer Internet-based products, such as optical and wireless equipment.

    Analysts noted that part of Lucent's problem was listening to their old big customers like AT&T and the Baby Bell companies rather than examining the future and the needs of those customers.

    "Lucent acknowledged on the conference call (with analysts) that their traditional customers didn't move as fast with optical technology as some of the other carriers. Lucent really misjudged the market, considering how close they are to AT&T," said Dave Heger, an analyst with A.G. Edwards. Lucent is a spinoff of telecommunications giant AT&T.

    Strong demand for optical equipment is coming from the newer carriers like Qwest Communications International and Global Crossing, Heger said.

    Lucent's warning regarding its optical business posed the greatest concern, he added. "This should be the company's strong growth area."

    During Tuesday's conference call, McGinn said revenue from optical networking equipment will be down 5 percent from the same quarter a year ago, while sales from traditional voice products will be down 13 percent. Wireless sales will remain flat.

    Lucent will see strong revenue growth in other parts of the business, however. McGinn said revenue from the company's fiber-optic component and chipmaking group will rise 50 percent, its Internet infrastructure sales will grow 40 percent, and revenue from its professional services business will increase 18 percent.

    McGinn said the company has resolved its manufacturing problems for optical equipment. Overall optical sales is declining 5 percent this quarter because service provider customers are still testing the equipment before deciding whether to buy it, he said.

    "We've been playing catch-up. Because we were late, we went through a lengthy certification process," he said. "And that's what's going on. We're in the throes of that with a lot of customers."

    Lucent executives said they will provide more details on potential bad loans two weeks from now when the company reports earnings.

    News.com's Dawn Kawamoto contributed to this report.