No need to worry about execution.
is rotting from the head down.
So say analysts after the telecom-equipment maker Thursday revealed its third earnings slowdown in barely six months. While Lucent's first-ever earnings warning,
disclosed in January, looked like a one-time failure to keep up with demand for new networking equipment, the emerging pattern of shortfalls points to a deep leadership problem, analysts say.
In slashing earnings estimates for its next fiscal year, the company cited critical failures in anticipating buyers' shift away from traditional phone equipment and in developing the optical gear that rivals are selling in force. Additionally, Lucent conceded that it failed to keep Wall Street abreast of these failures, always a sticky point with investors. Now, Lucent can expect to be punished in the market until it somehow rebuilds its tattered credibility, most likely through a management change.
The woeful tale knocked Lucent stock down 10 3/8, or 16%, to 54 1/8 Thursday, just 10% above its 52-week low and near its depths following the January massacre.
In reporting solid third-quarter earnings Thursday, Lucent forecast that revenue and earnings would grow by about 20% next year. That represents a sharp 25 cent-a-share drop in earnings guidance, putting Lucent well below the thriving industry's growth rate at a time when network operators are expected to boost spending by 32%, according to analysts at
Credit Suisse First Boston
. Analysts had been expecting Lucent to earn $1.55 a share in fiscal 2001, which begins in October.
Seeing the Light
Lucent Chairman and CEO Richard McGinn said the company dropped the ball on the development of 10-gigabit optical-transport equipment, a product that archrival
has been selling for some four years. Nortel's lead in that fast-growing segment has come into full view in the last year, as Nortel shares have rocketed higher while Lucent's have swooned.
"No one is more disappointed about this than I am," Lucent's McGinn said on a somber earnings conference call with analysts Thursday. "I take this personally. I'm accountable for what happened and what we need to do to fix it."
Cut It Out
line played just as poorly Thursday as it did in January, when Lucent first admitted it had an opticals problem. "Hey, this is obfuscation, not opportunity, here," says
analyst Steven Levy, who has a neutral rating on the stock. "So why would you pay a huge multiple for this kind of risk?"
"Their main problem is strategy," says
analyst Truc Do, who has what he calls a "polite" buy on Lucent. "They took the wrong product direction choice two years ago, and now they suffer because of it." Wit SoundView has no banking ties to Lucent.
Also falling flat were Lucent's attempts to distract investors from this latest failure. As anticipated, Lucent disclosed plans Thursday to spin off its microelectronics unit in an IPO slated for early next year. This is just the latest division to be jettisoned from the Murray Hill, N.J.-based telecommunications-networking giant. The company has already announced plans to sell its power systems unit and its slow-growing office network business.
McGinn said he will have a restructuring plan in place in 10 days for the remaining core Lucent phone and data networking operation. Analysts expect significant cuts. Subtracting the microelectronics unit and the office networking business, Lucent employs 105,000 people.
But even after this reorganization, it remains to be seen how well Lucent can address a market that has changed so significantly from a time when keeping
happy was the highest goal.
"There is a good reason to be skeptical," says Levy. "They missed their December quarter numbers and lowered guidance for March. When they announced March, they lowered guidance for June. And now, when they announced June, they lowered guidance for September and December."
The Vision Thing
Do says McGinn has surrounded himself with people who lacked the vision to recognize new optical opportunities in time. "He relies too much on his lieutenants to set the product direction for him," say Do, adding, "I don't know if the shareholders will be as forgiving of McGinn as I am."
A Lucent spokesman disputes the leadership and vision questions. "We're taking the opportunity to clear the decks and regain some momentum," the spokesman says. "We are taking the opportunity to reset the targets so we can balance ourselves for further growth. I think it is a responsible leadership action to step back and say, 'Here is what we need to do right now.' "
Vision aside, analysts said Lucent must face up to its laggardly pace of recent years. "The key for Lucent is to get away from its existing customer base," says Do. "They need to address the whole market opportunity as aggressively as the emerging networking companies."
"All these spinoffs are mostly cosmetic," Do adds. "I am not convinced the real problem of strategy and direction is being fixed."
As Levy asks, "McGinn says he's accountable,
but what does accountability mean here?"