Lucent Posts Another Profit

Updated from 7:24 a.m. EDT

Telecom investors are seeing a bit of progress at Lucent ( LU).

On Tuesday, the New Jersey maker of phone-network equipment posted second-quarter earnings that were in line with Wall Street estimates, marking its third straight profit after a long string of losses. The company also gingerly forecast a full-year profit.

For its second quarter ended March 31, Lucent reported net income of $68 million, or 2 cents a diluted share. These results compare with net income of $338 million, or 7 cents a share, in the first quarter of fiscal 2004, and a loss of $351 million, or 14 cents a share, in the year-ago quarter.

Wall Street had forecast a 2-cent profit on sales of $2.16 billion. Investors had expected to see a mixed report, balancing strength in wireless infrastructure sales with weakness in other businesses. Still, the stock sold off 43 cents, or 10%, to $3.90 as investors worried about a cautious management estimate of future margins.

"We achieved our third straight quarter of profitability and continued to make progress on many of our key priorities this quarter," said CEO Patricia Russo. "Our Mobility business remained strong, highlighted by an agreement with Verizon Wireless to provide mobile networking equipment for its high-speed wireless data service. We increased our Optical business by delivering next-generation solutions to customers around the world, and we announced five new customers for our Accelerate VoIP solutions. We also announced three new partnerships to enhance our next-generation networking portfolios and enterprise network security offerings."

Lucent said the latest quarter's gross margin was 43% of revenue, up from 41% for the first quarter. This quarter's gross margin included the favorable impact of product mix and continued cost reductions. Executives on a subsequent conference call said margins could be pressured slightly in coming months.

"At this point, we now expect annual revenues to increase on a percentage basis in the low-single digits for the fiscal year," said finance chief Frank D'Amelio. "While we may still see some quarterly fluctuations, we continue to expect to report a profit for the year, excluding any additional impact from a revaluation of the warrants" issued to settle shareholder suits.

For the third quarter ending in June, analysts expect Lucent to swing to a 2-cent-a-share profit from the year-ago 7-cent loss. And reversing the recent trend, Wall Street actually expects a year-on-year sales gain, in the neighborhood of 10% to around $2.2 billion.

But as has long been the case with Lucent, it's not just the numbers that tell the story. Recently investors have grown increasingly concerned about other issues at the company, such as a probe of business practices at its Saudi operations and the firing of four high-ranking workers in China.

Meanwhile, after a hot start to 2004, Lucent shares have cooled as the much-discussed spike in telecom-industry spending has failed to materialize.

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