Fourth and goal

Lucent in need of major overhaul Lucent Technologies' fourth quarter earnings call this week isn't expected to contain any major surprises because the cat already has been let out of the bag: The once high-flying equipment vendor has serious financial and cultural issues that desperately need addressing, and no amount of public relations hyperbole will disguise that fact.

Although there has been much speculation about the possibility CEO Richard McGinn could be ousted, the consensus is he will be given at least one or two quarters more to right Lucent's ship.

"I don't think McGinn is going to leave," said Nikos Theodosopoulos, managing director at UBS Warburg. "And there's no pressure from the board."

The prevailing sentiment is that with significant cultural changes and restructuring, Lucent can turn things around. The vendor still has clout with large carriers, a prime example being a recent $1 billion contract to supply SBC Communications with data, voice and access infrastructure products for its expansion into 30 out-of-region markets.

But with Lucent's share price hovering in the low $20 range, the company will have to pull off its about-face internally because it won't have the currency to compete for leading acquisitions. "In coming up with a string of disappointing quarters, they've lost a $160 billion market valuation in 10 months," said Jim Slaby, senior industry analyst at Giga Information Group. "It's scary to think what sort of start-up technology they might have scooped up if they hadn't made those management blunders."

For this week's earnings report, the big question is the financial guidance Lucent will give for fiscal 2001, Theodosopoulos said. "The stock is so low right now that you might as well set new targets that are definitely achievable so the company can catch its breath and start making some numbers."

He has lowered his earnings per share guidance for 2001 to 95› from $1.29.

The impetus was Lucent's earnings warning on Oct. 10 when, for the second time this quarter, the vendor dropped estimates for the fiscal fourth quarter ending Sept. 30. Lucent said it expected pro forma earnings to be in the range of 17› to 18› per share, well below analysts' consensus estimate of 27› per share and the 24› per share earnings the vendor posted in the same quarter last year. Lucent expects to report pro forma quarterly revenues from continuing operations in the range of $9.3 billion to $9.4 billion, a 14% to 15% increase compared with the year-ago period.

Lucent gave three reasons for the earnings shortfall: less-than-expected revenue and gross margins in the company's optical systems business; a greater-than-anticipated decline in circuit-switching sales and margins; and credit concerns in the emerging service provider market that led to increasing reserves for bad debt.

While the deteriorating performance of the optical systems business was a surprise, just as perturbing was the drop in circuit-switching revenues, according to a report by Greg Geiling, analyst at JP Morgan Securities. "A 13% decline in circuit-switching revenues shortly after management indicated that this segment would see growth in fiscal year 2001 forces us to question the accuracy of the information being used to guide investors," Geiling said. "It appears that Lucent continues to struggle to get its hands around its problems."

Indeed, the only factor that seems to be keeping Lucent shares from dropping through the floor is the pending spinout of the microelectronics unit. Some analysts estimate the business could be worth up to $70 billion; as of last week, Lucent's total market capitalization stood at $76 billion. If the cultural changes within core Lucent don't happen quickly enough, expect more divestments and spinouts to try to create shareholder value, Theodosopoulos said.