LUCENT SEEKS MARGIN BOOST BY ANY MEANS NECESSARY

It's a sign of the worst of times when Lucent Technologies loses almost $9 billion in a quarter and its stock price bounces at the next day's opening. Of course, the implication is that Lucent has hit bottom and can go nowhere but up.

But the path to “up” — profitability and positive cash flow by next September — is unclear, and Lucent is having a hard time convincing investors that it has a long enough ladder.

Good news was evident in the company's fiscal fourth quarter report: The company reduced its annual expense run rate by $2.4 billion, lowered its employee base to 77,000 and reduced operating expenses by 26% sequentially.

But the equipment market will decline 15% to 20% in 2002. And Lucent's target markets will contract about 10%, said Henry Schacht, chairman and CEO of Lucent. The December quarter in particular will be a dud.

“Industry spending in the first fiscal quarter of 2002 will be even lower than those levels,” Schacht said.

Absent any large deals such as the Cingular Wireless contract it landed last quarter, Lucent will have to rely on cost-cutting, fatter gross margins and one-time asset sales to even approach eking out a profit.

Lucent's gross margins fell to 12.5% in the quarter, down four percentage points sequentially. Indeed, one of the only bright spots in Lucent's fiscal fourth quarter — international contracts, particularly CDMA gear sales in China — actually dampened gross margins.

Lucent needs to get gross margins near 30% to achieve profitability, according to Nikos Theodosopoulos, senior analyst for UBS Warburg. The company outlined a number of areas expected to contribute to higher margins, but the details were characteristically sketchy.

For instance, it's unclear which new products are supposed to boost Lucent's margins by two to five percentage points by 2003. The vendor could expand the functionality of its WaveStar lambda router, for example, or launch more offerings in the metro optical access category, analysts said.

“Customers are screaming for better metro optical access,” said John Gonsalves, a vice president at Adventis. To accomplish this, Lucent must shorten the internal path from R&D concept to revenue-producing product — a trick that has eluded it thus far, Gonsalves said.

Margin problems are at least diverting attention from Lucent's liquidity issues. The company exited the quarter with $2.4 billion in cash, but next year won't be a cakewalk. Lucent will burn about $5.6 billion in fiscal 2002, including $1 billion from vendor financing agreements and $2.2 billion in pending cash outlays from both phases of its restructuring plan, Theodosopolous said. Its current cash balance and available credit facilities amounts to about $5.4 billion.

Executing the sale of its optical fiber systems unit to Furukawa Electric by December will be crucial to giving Lucent any wiggle room this fiscal year. Furukawa could be trying to renegotiate the $2.75 billion price for Lucent's fiber unit, given the worsening market outlook since the deal was announced in July.

But that's not likely, Gonsalves said.

“All this has been factored in. The initial pricing was $8 billion, then $6 billion and then $4 billion. I don't see this getting renegotiated.”