LUCENT LOOKS FOR A WAY OUT WITH NEW PRODUCT PORTFOLIO

Lucent Technologies hopes to follow a revamped product road map to profitability in 2002, but the inertia dampening carrier spending presents formidable opposition.

Lucent estimates the equipment market will return to a 10% to 12% growth level by 2003, at which time the company expects to return margins to the 35% range from their current level of less than 15%.

“Primary end-user demand out there is putting traffic on networks,” said Bill O''Shea, president of Lucent''s Bell Labs. “Ultimately — and we don''t know when — service providers are going to have to build out to support that traffic.”

Lucent Chairman and CEO Henry Schacht said the company is not underestimating the “murky” market but plans to increase its share as “the vendor partner of choice” when the market rebounds. But Lucent still has a rough 2002 to weather. Analysts believe North American service provider spending will dip as much as 29% in 2002, with fourth-quarter spending in 2001 projected to be 40% lower than the year''s opening quarter.

Lucent said that as much as 25% of its fiscal 2002 revenues will come from its growth platforms — including next-generation optical and third-generation wireless — although most of the new products will not be generally available until Lucent''s fiscal second quarter. Usually, it takes six months after general availability for product sales to show any volume, Lucent executives said.

Tier 1 providers — particularly Bell companies — still are spending, but a “big backlog” in testing means they''re opening their pocketbooks slowly, according to Dave Dunphy, senior analyst for Current Analysis.

Although Lucent didn''t report improved financial prospects for 2002, the industry found comfort that its focus is on products rather than liquidity woes. “There''s been a lot of silence and anticipation and concern over how long it''s taken [Lucent] to put a story together,” Dunphy said. “[Now] they seem to be reasonably well-targeted against competitors'' boxes.”

For example, Lucent touts the new LambdaXtreme — a long-haul dense wave division multiplexing system that supports 10 and 40 gigabit wavelengths — as having the lowest cost per gigabit per kilometer in the industry.

“If they have something that competes more closely with capabilities of Corvis, they have a much stronger end-to-end management story for carriers,” Dunphy said.

Lucent''s new multiservice switch, the TMX 880, is designed to let carriers collapse ATM and IP overlays onto a single network infrastructure — the next-generation IP/multiprotocol label switching (MPLS) network.

“The MPLS standards offer a way to accomplish a true multiservice network,” said Nancee Ruzicka, program manager for The Yankee Group. “Until now, it has only been implemented in IP routers.”

Bell companies are good candidates for multiservice switches because they have all different kinds of traffic and overlays, Ruzicka said. Lucent-friendly Verizon Communications, for one, has issued a $1 billion, five-year request for proposal for a metro regional buildout.

Although the new products are helpful, analysts generally agree none was earth-shattering. “They still have to bring the products to market and win the business,” said Steve Levy, analyst for Lehman Brothers. “But this should give credibility to [Lucent''s] ability to grow in 2003 and beyond.”