Lucent: Next-gen growth outpaces legacy decline in ‘07

After long struggling to grow next-generation technology revenues faster than that from legacy technologies declined, Lucent Technologies executives pointed to a light at the end of the tunnel over the next two years. However, in today’s fiscal fourth-quarter earnings call, they also predicted the company’s wireless and wireline groups would not grow as much in the next fiscal year as they did this year.

Lucent’s chief executive officer Pat Russo described the next two years as a period in which revenue growth from new next-generation products and services will surpass revenue declines in legacy businesses such as circuit-switched voice equipment.

“We believe 2006 will be the year when those declines [in legacy segments] are largely offset by growth in next-gen areas such as optical, data and converged core and IMS products, all areas we’re targeting for investment,” Russo said. “In 2007, we expect growth from next-gen products will actually outpace the decline in legacy products.”

Overall, Lucent expects to report revenue growth in the mid single digits in its fiscal year 2006. The company expects its wireless revenue to continue growing throughout the next fiscal year but at a more “modest” pace than the 12% growth that segment saw this year, when it contributed $4.60 billion. In contrast, Lucent expects its wireline revenue to remain flat or dip slightly in fiscal 2006 from the $2.45 billion reported for fiscal 2005. And it expects its services business to grow as fast or faster next year than the roughly 10% growth that segment saw this fiscal year, when it contributed $2.13 billion.

The company reported $9.44 billion in revenue for its 2005 fiscal year (which ended Sept. 30, 2005), a 4% increase. Its net income declined by nearly 41% to $1.19 billion (or 24 cents per share) in this, its second consecutive profitable year this century.

Lucent expects to cut about 2,000 employees over the course of the next fiscal year, the company announced today, but it also expects to simultaneously add staff overseas and in particular growth areas. In all, the company expects its net headcount to be down by about 1,000 in a year’s time. At the end of September, Lucent employed about 30,500 people.

Lucent conceded that, despite the importance of recent wins in the IP multimedia subsystem (IMS) architecture space, such as its contracts with SBC and Cingular Wireless, the company does not expect to record “material” revenue from IMS in its 2006 fiscal year relative its overall annual revenue. But Russo described the recent IMS wins with a high degree of gravity due to their strategic implications.

“The significance of these IMS wins is more than just the specific elements of the IMS portfolio,” Russo said. “It’s about being in the heart and the brain of our customers’ networks. When you’re there, you’re involved in how to connect almost every service that is ultimately going to get connected in a truly converged-network environment. We’re just at the beginning of that, in my view.”

“There’s no question that there’s a good marriage between our services strategy and what’s going on with IMS,” she said. “The demand for consulting, professional and integration services to integrate with other vendors’ stuff is there, it’s real. The implications of these IMS wins will have tentacles in other parts of the business.”