Lucent's sober reality

Lucent (www.lucent.com) Thursday announced further cost-cutting measures -- including revised loan terms, a new sales focus and the immediate termination of 2,200 employees. The news was delivered to investors, analysts and the media by top executives, including chairman and CEO Henry Schacht.

This second restructuring phase includes a revised sales strategy focused on Lucent’s top 30 customers in the 20 countries those customers concentrate on. This new sales strategy, combined with renegotiated financing terms and total job cuts of approximately 70,000 (early 2001 employment was 132,000) should turn a profit for Lucent by 2002 and place it squarely within industry-standard growth patterns by 2003, according to the executives.

“If you look at the wireless market, Lucent has floundered trying to establish a GSM position in Europe,” said Keith Mallinson, Yankee Group executive vice president of research (www.yankeegroup.com). “They have this story that they are well-positioned for next-generation GSM, which is UMTS, because they have CDMA experience, and UMTS is a CDMA-based technology.”

Mallinson acknowledged Lucent has next-generation technology advantages over GSM infrastructure providers in Europe, such as Ericsson (www.ericsson.com), Nokia (www.nokia.com) and Siemens (www.siemens.com). But Lucent’s advantage will be no substitute for the competition’s deep business relationships and historical systems knowledge, he said.

“In the face of all that, the best thing it can do at the moment is focus resolutely on retaining those 30 customers and strengthening its base where it is already strong, rather than trying to burst out and displace people in the GSM world,” Mallinson said. “That is a more viable position. And they seem to actually be recognizing this now.”

Lucent shares were down 10 cents to $6.78 in afternoon trading Thursday on the NYSE. They climbed 37 cents by Friday afternoon to $7.02 as of 5 p.m. E.S.T. Lucent yesterday also announced commercial availability of its cdma2000 equipment and software for next-generation network upgrades.

Attendees to the financial conference questioned Lucent executives’ inability to justify disparities between previous financial guidance and yesterday’s new numbers, based in part on new “flexibility” in loan terms created in cooperation with lenders. Lucent CFO Frank D’Amelio said the company had “absolutely adequate funding sources.”

Although its goal is to be profitable by 2002, Lucent chose not to provide specific financial guidance for the coming year, leaving some to question whether the first months of next year will be a reflection of the company’s $3.25 billion 3Q01 loss.

“We realize how big a challenge this is,” said Bill O’Shea, executive vice president. “We created a special program office to manage the process and transition. And we expect this transition to go smoothly. We will be smaller and leaner and still will be the largest provider of equipment and software to service providers in the world. We will be the only company focused on this set of customers when it’s all over.”

The telecommunications market has gotten increasingly competitive, and with Lucent’s new focus on its 30 core customers, which account for 75% of revenue, any slip-up could spell disaster for restructuring plans. It also plans to increase liquidity by selling real estate and closing manufacturing plants. Lucent’s target spin-off date for Agere Systems (www.lucent.com/micro/) was extended six months past the original date of late September. Mallinson said Lucent’s overall plan for restructuring appears to be very rational.

“They fouled up enormously,” he said. “But they are now making the best of a bad bet. You regress back to the core, and toward the markets that are pretty solid. Optical networking will come back. And at least on the wireless side, there’s a market with solid potential. They have to make sure they really can execute.”

And perhaps that is what most investors and industry observers fear - that the network giant may not be able to execute its own restructuring plan in an effective manner.

Lucent’s O’Shea acknowledged as much, saying yesterday “We should have been doing this all along.”