Questions await Lucent earnings: Will new CFO revise estimates downward?

For equipment companies, the April to May earnings period is usually a sleepy one, but Lucent Technologies will get a lot of attention this week as it reports its fiscal third quarter numbers.

First, the communications giant has a new chief financial officer, Deborah Hopkins, who could have the unenviable task of lowering estimates for the company's fourth quarter and beyond. Second, the company needs to show evidence that its 10 Gb/s optical system is winning customers. And third, Lucent executives will face questions regarding the rumored spinoff of Lucent's Microelectronics business unit. Complicating these issues is Lucent's stock price, which is treading water just slightly above its 52-week low.

Analysts surveyed by First Call estimate that the company will show year-over-year earnings per share growth of about 17%, to 29cents per share, and revenue growth of 21%, to $9 billion. The estimates do not include the spin off of Avaya, the enterprise networks group.

"The quarter will be OK, and the balance sheet should improve, but what will be interesting is what they say about the outlook going forward," said Nikos Theodosopoulos, managing director of UBS Warburg.

Investors' primary concern should be the expectations of growth and the impact it has had on Lucent's balance sheet, said Steven Levy, analyst at Lehman Brothers.

"The quarters are back-end loaded, the balance sheet is stretched and account receivables and vendor financing are up year over year," Levy said. "I do expect that they will somehow revise guidance downward for the fourth fiscal quarter and fiscal 2001."

In the second quarter, Lucent announced more than $1 billion in new contracts for optical networking products. Overall growth for the product sector is expected to continue, but how fast the newly shipping OC-192 product gains sales traction remains a question. Lucent landed $300 million in contracts during the second quarter.

"The OC-192 product should be a primary catalyst for revenue growth in the second half of 2000," said Greg Geiling, J.P. Morgan Securities analyst, in a report. Lucent tripled optical manufacturing capacity in the second quarter and expects to double it again in the third quarter, he said.

Most analysts view a potential spinoff of Lucent's MicroElectronics unit as positive, although Lucent officials have not confirmed if the much-speculated spinoff is even being considered.

"The business would have a higher valuation as a stand-alone company as opposed to being part of Lucent," Theodosopoulos said. "It would increase employee retention within Microelectronics where there's been an increasing level of turnover in the past year."

Although the deal also would unlock significant value for shareholders, it also would excise a piece of Lucent's business that is growing at a 20% to 25% clip - on par with its service provider business.

"Microelectronics could grow faster on its own, but the problem with the spinoff is that it could make Lucent's [overall] balance sheet look that much worse," Levy said.

Lucent is scheduled to report actual earnings on July 20.