Lucent looks for profitability with new products

By : |November 8, 2001 0

Ben Klayman

CHICAGO: Telecommunications equipment giant Lucent Technologies Inc., in the
midst of slashing jobs and selling businesses, said on Wednesday that it has the
new products to allow it to return to profits next year as targeted.

The Murray Hill, New Jersey-based company discussed with analysts and
investors several new products — including routers and optical transport
products — that will be introduced over the next year in the wireline and
wireless markets, which offer the market size and growth to help Lucent boost
profits. Meanwhile, the company is dropping products that lose money or present
little growth prospects.

"It is a matter of execution. We’ve spent the whole year rethinking what
we’re trying to do," Chairman and Chief Executive Henry Schacht told
reporters after meeting with analysts in New York. "We really spent this
year rethinking, resizing and refocusing, and we know what we need to do now and
we’re in the process of doing it."

Lucent, which recorded a loss of $16.2 billion in fiscal 2001, launched a
major restructuring in January, slashing its work force to 77,000 by the end of
September from 106,000 at the start of the year, with plans to cut further to as
low as 57,000 by the end of March.

While dealing with the slowdown in spending by its telecom customers, Lucent
also has sold plants and businesses it considered noncore assets in its aim to
return to profitability in its 2002 fiscal year.

It expects to close the $2.75 billion sale of its fiber-optic cable unit to
Furukawa Electric Co. Ltd. and Corning Inc. by the end of 2001.

Lucent, spun off by telephone and cable giant AT&T Corp. in 1996, has
been paying the price for its own missteps in manufacturing and product
development, as well as management turnover and intense competition.

Explaining new products
The slowdown in industry spending that has led to multibillion-dollar losses and
charges at rival Nortel Networks Corp. and fiber-optic powerhouse JDS Uniphase
Corp. only added to Lucent’s woes.

Lucent shares closed off 36 cents, or almost five per cent, at $7.01 in
trading on the New York Stock Exchange. Its stock has plunged about 90 per cent
from its all-time intraday high of $84.19 in December 1999.

Lucent’s stock has dropped 48 per cent this year, lagging the Standard and
Poor’s 500 Index by 40 per cent. However, it has outperformed the S&P
Communications Equipment Index by 26 per cent over that time.

The company spent Wednesday morning explaining the new products it believes
will help it hit its targets, which were reiterated by Chief Financial Officer
Frank D’Amelio. He said the company is still targeting 10 per cent to 12 per
cent growth and gross margins at 35 per cent of revenues in fiscal 2003.

Executives said as much as one quarter of fiscal 2002 revenues will come from
the new products.

Schacht said the new products will allow Lucent to earn higher profits, while
enabling customers, especially the large telecommunications companies, to cut
costs. He also said the telecom market will be dominated by larger players.

"Higher margins for us at lower cost to (customers). That’s the name of
the game," he said. And while telecom carriers are postponing capital
spending, they will not be able to do that forever as traffic on their networks
continues to grow, Schacht said.

Product onslaught welcome
Analysts and investors welcomed Lucent’s product onslaught, given the company’s
past late introductions and weak product showings, but wondered if the company
was too optimistic given the intense competition.

"The discussion of the new products was a bit anticlimactic,"
Gerard Klauer Mattison & Co. analyst Mike Cristinziano said. "They said
the right things, but at the same time it seems they’re still concerned about
the outlook for the market."

He added a lot of Lucent’s near-term success depends on the new products and
it is not clear the company will be able to increase production fast enough.
However, he said the company’s new focus on wireline and wireless businesses as
well as moves to cut money-losing and underperforming products were welcome.

The company also will be competing in some areas with tough companies,
including Cisco Systems Inc. and Ciena Corp., analysts said. In the end, Lucent
will need the market to rebound no matter what it does, said Henry Asher,
president of the North Star Group, a New York-based investment adviser that owns
shares of Lucent.

"What can they or their competitors do in this environment? The answer
at this point is they’re constrained by overcapacity in the industry and the
cuts in capital spending," he said.

Lucent repeated its previous forecast of overall industry spending declining
15 per cent to 20 per cent in 2002, while targeted larger customers’ budgets
shrink 10 per cent or more. In late August, it forecast its larger customers’
spending would be flat amid an industry decline of 10 per cent.

Lucent executives also said they believe over the next two years demand in
the market will result in growth in the 10 per cent to 12 per cent range.

(C) Reuters Limited.

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