Long road to recovery

Lucent Technologies begins rebuilding this week after announcing a 10,000-employee reduction in its work force and a seven-point cost-cutting program that will leave no part of the company unscathed.

But the vendor's first quarter earnings report suggests that the road to recovery will be bumpy. The lowlights included a $1 billion quarterly operating loss, a 36% drop in sales to service providers, and a 24 percentage point decrease in gross margins. In addition, revenues from continuing operations were off 26%, six percentage points higher than previous estimates.

“The revenue level came in well below expectations, and the loss on a per-share basis was on the low end of guidance,” said Lawrence Harris, securities analyst at Josephthal & Co.

To try to stop the bleeding, Lucent unveiled a restructuring plan that calls for billions of dollars in cuts to operating expenses, working capital and capital expenditures. The vendor also plans to expand its use of contract manufacturers, discontinue some product lines and consolidate development activity.

“We're moving from a multidivisional company to one with single focus, and we're eliminating redundancies and streamlining operations across the board,” said Henry Schacht, Lucent's chairman and CEO.

Lucent is trying to move swiftly to execute on the plan. The layoffs are scheduled to be completed by July. In the next six months, Lucent expects to complete negotiations with contract manufacturers to slash its manufacturing payrolls. It plans to outsource virtually all the work done in its Oklahoma City plant and a substantial portion of the assembly and test work performed at its Columbus, Ohio, facility, Schacht said.

On the product side, Lucent already has discontinued its All-Metro optical networking system, planning to merge it with the optical networking platform acquired in the Chromatis deal. More pruning of the Lucent's expansive product portfolio is forthcoming, Schacht said.

“Lucent has a lot of little products they've been hanging on to,” said Ken Kelly, senior research analyst in the convergent strategies and network architectures group for Stratecast Partners. According to Kelly, candidates for the guillotine include Lucent's digital access and cross-connect systems, its older transmission gear and even the 4ESS legacy switch.

Lucent has yeoman's work to do in changing its sales culture. The company announced it will focus more on large regional incumbents instead of competitive carriers and be more selective in its use of customer financing.

All this is going to take time to filter through to Lucent's bottom line, Schacht said. “While actions commence immediately, most of the financial impact will occur in the second half of the fiscal year,” he added.

Indeed, conspicuously absent from Lucent's earnings call was any earnings guidance for the remainder of 2001, including details about how the company plans to grow sales. Schacht would only say that revenues would grow quarter-over-quarter and that operating losses would be reduced gradually.

“It seems to me that the restructuring program at Lucent is far from complete,” Harris said, “They haven't determined what the profitability targets will be.”

Meanwhile, Lucent's balance sheet is rapidly deteriorating, said Nikos Theodosopoulos, managing director at UBS Warburg. The vendor's days sales outstanding (DSOs) for accounts receivables increased to 114 days from 100 days in the quarter, and inventories jumped by $1.2 billion to $6.9 billion. An increase in DSOs usually means sales are coming in very late in the quarter or that customers are delaying payment.

“It sounds like there are some issues with customers deferring payments,” Theodosopoulos said.

Lucent's March quarter will show little improvement, Harris said. “We just know that the budgetary process at carriers is taking longer this year.”

Lucent's recovery plan

• Lay off 10,000 employees by July and increase the use of contract manufacturers, eliminating ann additional 6000 positions by the end of fiscal year 2001
• Slash manufacturing, R&D and sales, general and administrative costs by $2 billion and reduce capital spending by $400 million
• Focus sales force on large incumbents, be more selective with vendor financing and improve management of inventory and receivables
• Take a one-time charge of between $1.2 billion and $1.6 billion in the second quarter for job cuts as well as write-offs of inventory and facility consolidations

Briefly

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