Lucent aims to rise from losses by 2002

Jessica Hall

PHILADELPHIA: Telecommunications equipment maker Lucent Technologies Inc.

said on Thursday that it expected a rebound in profits next year as it

restructures to almost halve its work force and narrow its focus to serve large

telephone and Internet service providers.

Lucent, spun off from telecommunications and cable television giant AT&T

Corp. in 1996, stumbled after a series of manufacturing and product-development

blunders, management turnover and intense competition. Lucent launched a

restructuring in January to stem the loss of billions of dollars by cutting jobs

and shedding businesses.

After amending terms of its credit facilities last week, Lucent got the green

light to proceed with the next stage of the restructuring, which will result in

a $7 billion to $9 billion charge in the fourth quarter.

In a meeting with analysts, Lucent stressed it now has the financing in place

to complete the restructuring and fund its operations until the company starts

making money. It said it would have $6.25 billion in cash, including proceeds

from the sale of its optical fiber business that will be more than enough to

cover its near-term spending needs of $3.2 billion to $3.5 billion.

It also reiterated plans to cut costs, improve gross margins and reduce its

work force to about 60,000 workers, down from about 106,000 at the start of the

year. The company, however, said it would not outline until November what other

product lines or businesses will be cut.

Problems fixed, but then….



"There's still a lot of skepticism around the execution issues. While
the restructuring discussion sounded fine, the key to this execution. That's the

real sticking point," said Deutsche Banc Alex. Brown analyst George Notter.

"Our areas of concern are Lucent's ability to ramp gross margins and

their ability to generate sizable new revenue from new products next year,"

Notter said. "The question is how do you sustain an existing $20

billion-plus revenue stream despite cutting sizeable numbers of people out of

your business?"

"Restructuring our market approach, restructuring our product portfolio

- it's a lot of things to keep track of. We understand how big a challenge it

is. We are organized to face the challenge," said William O'Shea, Lucent's

executive vice president of corporate strategy and business development.

"What is going to happen when we are finished? We are going to be a

smaller, leaner company," he said.

Financial outlook



Lucent reiterated that it expects its fourth-quarter net income to improve
over the current quarter, but it did not provide a specific forecast. It also

declined to predict fourth-quarter revenues, citing market uncertainties.

"The liquidity issues is not a problem any more, and the restructuring

plan is on target. Unfortunately all investors want to know is about Q4

(results) and they didn't give much guidance there," said Dresdner

Kleinwort Wasserstein analyst Ariane Mahler.

Wall Street analysts expect Lucent to post a loss of 21 cents a share in the

fourth quarter, according to research firm Thomson Financial/First Call. In the

third quarter, Lucent posted a loss of $1.89 billion, or 55 cents a share,

including a $684 million restructuring charge and other items. Its loss from

continuing operations totaled $1.2 billion, or 35 cents a share.

In fiscal 2002, Lucent said it expects revenues in the overall communications

industry to fall by 5 percent to 10 percent, but the industry segment it serves

- large service providers - will remain "roughly flat." Mahler

characterized Lucent's forecasts as "a little bit aggressive."

The company said it expects to return to profitability in fiscal 2002, one

quarter before it achieves positive operating cash flow. Lucent aims to be

positive on the basis of EBITDA (earnings before interest, taxes, depreciation

and amortization) by March 31 - its target date for completing the spin-off of

its optical components and chip maker Agere Systems Inc. affiliate by the end of

March.

In 2003, Lucent expects its revenues to increase by 10 percent to 12 percent.

Gross margins will be about 35 percent. "Our expectation is we will

probably see the market coming back in '03," O'Shea said. "We doubt

that we will ever see the 20, 25, 30 percent growth rates that we saw

previously, but it is a solid industry and a solid business."

Equipment makers have been hurt by a general reduction in capital spending by

telecommunications companies, as well as the closure of many start-up carriers

that buckled under their massive debt loads.

Lucent has refined its business to focus on the world's largest and most

financially stable communications companies. It plans to direct its research and

development efforts and dollars into optical, data and wireless products, as

well as the software and services needed to operate networks.

(C) Reuters Limited 2001.