With its legacy problems mostly in the rearview mirror, Lucent (LU) has freed itself to confront a challenge that looms as large as ever: navigating an ever-weakening telecom equipment market.
In the past three months, Lucent has settled a
whistleblower lawsuit, reached terms over a
Securities and Exchange Commission
investigation and, as of Thursday, settled a massive
shareholder lawsuit that will cost the company as much as $420 million. All of those actions helped to resolve the missteps of a management team that departed unceremoniously nearly three years ago.
Now, having delivered Lucent from the distractions and damages of its past misdeeds, CEO Patricia Russo and her team must deliver on financial promises that look increasingly difficult to keep. In fact, given the war, an uncertain economy, the cost of legal settlements and the unabated decline in technology spending, some analysts and investors are bracing for more disappointment from the networking gearmaker.
With Lucent already having cut costs to the bone and recently
issuing shares by the million to reduce debt, concerned investors will be closely watching the company's financial performance. Lucent rose 2 cents Friday to close at $1.50.
Citing ever-tightening telco spending, UBS Warburg analyst Nikos Theodosopoulos cut his revenue projections for Lucent in fiscal 2003 and 2004. Theodosopoulos trimmed his 2003 sales view by 3% and his 2004 revenue projection by 5%.
A Lucent spokesman declined to comment on the prospect of a shortfall and added that excluding the 11-cent-a-share charge associated with Thursday's global settlement, there have been no announced changes to the financial outlook.
That said, Lucent has set the bar unusually high for its fiscal second quarter. In January, still reeling from a long run of revenue declines, Lucent
projected a 20% sequential sales jump in the current quarter, fueled largely by wireless equipment orders from China and India. Lucent also said it would reach profitability by its fiscal year-end in September.
Rosy and Riveting
But even as Lucent provided that guidance, many investors regarded the company's gains as being driven by one-time events that don't fully reflect the down trends in the wireless market. For example, according to a Lehman Brothers report Thursday, wireless equipment spending will fall 17% below 2002 levels. And that slide is expected to continue, though more moderately, through 2004.
To adjust to the current trickle of demand, Lucent has dropped several product lines and cut its workforce by two-thirds from peak levels two years ago. But some investors say that has left the company weaker amid a still weakening market.
"The second half of the year will be very tough," says one New York hedge fund manager who has no positions. "Even if they have new products to offer, who are they going to sell them to?"
To be sure, Lucent is now able to focus more on questions about its future rather than problems from its past.