Lucent explains its revenue shortfall

In its fiscal first-quarter earnings call this morning, Lucent Technologies officers did their best to explain the quarterly revenue shortfall they announced Jan. 13, predicting essentially flat revenues for the coming 2006 fiscal year.

“We are clearly disappointed, but we consider this a temporary setback,” Lucent Chief Executive Officer Pat Russo said. “We’re confident our performance will be much stronger for the remainder of the year.”

Lucent attributed its shortfall to a lack of so-called “budget flush” in December, when vendors often see a boost in spending as customers push to spend what remains in their annual budgets. Whereas Lucent has benefited from budget flush in the past, this time it reported not only a lack of flush but, among some customers, spending decreases.

“We saw no capital flush,” Russo said. “We just flat out didn’t see it. We actually saw a tightening up [of customer spending] very late in December. I’m not sure I can answer why. You’d have to almost go customer by customer.”

Much of Lucent’s quarterly revenue comes in the last few weeks of each quarter, Chief Operating Officer Frank D’Amelio pointed out, addressing what one analyst on today’s call referred to as “a pretty big miss we didn’t see coming.”

“There are some years you see an availability of cash late in the year,” Russo said. “This wasn’t one of them.” Prompted by D’Amelio, she then immediately added, “ At least not for us.”

Analysts have generally regarded Lucent’s shortfall as reflective of customer-specific issues rather than of the sector. In a Jan. 13 research note (one that didn’t refer specifically to Lucent), Lehman Brothers analyst Marcus Kupferschmidt wrote, “Our general impression is that spending was overall favorable to equipment vendors in [2005’s fourth quarter, Lucent’s first fiscal quarter], and we specifically saw some signs of budget flush at Cingular.”

However, in a note issued today, Kupferschmidt said Lucent's complaints regarding a lack of year-end budget flush were echoed by access equipment vendor Adtran in its own quarterly earnings call this morning.

In another Jan. 13 note, UBS Investment Research conjectured Lucent’s shortfall was due to slow mobile equipment sales in China and to Verizon Wireless.

In today’s call, Lucent did report lower sales of CDMA equipment in China and the expectation that it could continue to negatively impact deployments there going forward. In the U.S., mobility revenue was down 6% sequentially resulting from a drop in application sales.

Lucent reported a net loss of $104 million, or 2 cents per share, for its fiscal first quarter, which includes a $278-million charge related to a lawsuit filed against it by Winstar, which Lucent is appealing. Fiscal first-quarter revenue dropped 16% sequentially to $2.05 billion. Revenue from the United States dropped 11% sequentially to $1.3 billion.

The company expects flat to slightly positive revenue growth for the 2006 fiscal year, with services contributing the only positive annual revenue growth. Services revenue is projected to grow at or slightly below 10% in fiscal 2006, while mobility revenue is expected to be flat, and the combined revenue from Lucent’s Multimedia Network Solutions group (which includes optical, access and data networking) and its Converged Core Solutions groups (which includes legacy voice and IP Multimedia Subsystem and voice-over-IP core products) should decline slightly, the company said.

Lucent is also searching for a chief financial officer to replace D’Amelio, who was named COO this month.