Tightening the tourniquet on costs, Lucent (LU) insists it can still overcome customer stinginess and return to profitability this year.
The battered New Jersey networking shop posted softer-than-promised sales Wednesday morning and trimmed its fiscal 2003 sales forecast, as big telco customers remain in penny-pinching mode. Even so, Lucent insists it will make good on a vow to return to profitability by the fourth quarter, by reaping the benefits of its latest cost-cutting effort.
The stock rose a nickel Wednesday to $1.73 as Wall Street applauded the company's continuing revival following a brush with death that started more than three years ago.
"They've made some good progress," says RBC Capital's John Wilson, who has a sell rating on Lucent. "They will probably have a good September quarter and profitability is not out of the realm of possibility."
Lucent said as much on its conference call Wednesday, advising analysts that it intends to reverse the red ink of 12 straight quarterly losses through the magic of expense reduction. And with industrywide spending remaining in the doldrums, it's hard to imagine what the alternative to the belt-tightening might be.
As if to drive that point home, big Lucent customer
said Wednesday it was slashing its 2003 spending plan by $400 million, or 12%, to $3 billion. Last year, AT&T spent $3.9 billion on capital investments such as network equipment.
Seeing some scribbling on the wall, Lucent expanded its revenue decline forecast for fiscal 2003 to as much as 25% from 20% previously. And though executives continue to see breakeven as attainable on quarterly revenues of $2.4 billion, their own projections call for average quarterly revenue of $2.28 billion.
Little to Go On
Observers say the optimistic breakeven figure points to high expectations for the seasonally strong fourth quarter. Alas, Lucent didn't offer any sales guidance for the next two quarters that might help to support their rosy remarks. It's possible that the company may have backed away from offering sales projections for a bit after the latest quarterly shortfall: Having
forecast a 20% sequential revenue increase for the second quarter, Lucent came up light Wednesday with a 16% gain.
Lacking convincing evidence, analysts on an earnings call Wednesday voiced some skepticism about the company's profit goals and particularly its gross margins. CFO Frank D'Amelio told analysts on the call that there were three drivers that affect profits: Cost reductions, sales volume and the mix of products sold. Of the three, says D'Amelio, "expect margin improvement to come from cost reductions."
And don't expect Lucent's services business to turn things around for the company any time soon. Though company executives say the services and consulting unit will one day bring 9% growth in a $30 billion market, that vision remains a ways off.
The much-ballyhooed services business has posted weakening revenues and falling margins. Profit margins dropped 2 points to 12% in the second quarter, as demand for gear and high-level network planning has waned in the U.S. market.
Still, if Lucent isn't exactly making investors do handsprings, at least it's not losing ground any more.
"I think we'll see them bounce around breakeven for some time to come, like a lot of these companies," says Wilson, whose firm has no underwriting ties to Lucent.