Lucent At Bat
Part 1

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By Phil Weiss (TMF Grape)
October 23, 2000

Earlier today, Lucent Technologies (NYSE: LU) announced the firing of its chairman and chief executive officer, Richard McGinn. It's been a pretty tumultuous year for Lucent. In my neck of the woods there's a lot of excitement centered around the fact that both local baseball teams are in the midst of the first Subway Series in 44 years. In that vein, I'd like to take a look at Lucent's performance this year in baseball terms.

Pre-game Show
On the surface, it seems that Lucent Technologies would be the type of company any investor interested in purchasing companies with expanding possibilities would investigate. After all, Lucent is the world's biggest telecommunications equipment maker and, along with competitors such as Cisco Systems (Nasdaq: CSCO) and Nortel Networks (NYSE: NT), it is one of the leading manufacturers of network infrastructure products.

But stocks should never be purchased without proper due diligence. If you perform due diligence on Lucent, you'll see that it's having more than its share of problems. There are those who favor investing in companies trading significantly off their highs, operating under the assumption that they'll return to those lofty levels again someday. My approach to investing involves staying away from companies experiencing problems, until there are at least some signs of a turnaround.

It seems as if Lucent has spent most of the year trying to convince investors that its troubles are behind it and the road ahead is paved with gold. Yet, it has had so many negative earnings pre-announcements this year, it seems like Lucent should start scheduling quarterly conference calls for negative earnings pre-announcements and actual earnings releases.

Batter Up

Now let's take a look at its performance so far this year. Lucent investors and the stock market itself will serve as the umpire.

Strike 1
The first strike was called on Lucent in January, when it pre-announced an earnings and revenue shortfall for the first quarter. This was primarily attributed to Lucent's failure to foresee shifts in customer purchases of optical networking products, and its inability to meet demand. There were also capacity and deployment issues related to these and other products, as well as changes in customer purchasing problems. At the time, Lucent said the problem would be cleared up by the end of its March quarter.

Strike 2
It looked like things were getting better for Lucent until it released its third-quarter earnings in July. It set expectations for Q4 2000 and fiscal 2001. The news wasn't good and the market reacted by ringing up Strike 2. Fourth-quarter expectations were lowered due to product transition issues -- Lucent didn't foresee the rapid decline in circuit switching sales. It also admitted that it was taking longer than expected to ramp up in optical networking. At the time, Lucent's new CFO, Deborah Hopkins, promised that this wouldn't happen again. Guess what? It did.

Strike 3
With an 0 and 2 count, Lucent needed to protect the plate. It couldn't. Strike 3 came in early October when Lucent pre-announced that the problems with its fourth quarter were even worse than it led investors to believe back in July.

Amazingly, the problems continue to be at least partially related to Lucent's optical systems business. This really should have been a home run for Lucent. It's actually the number two player in this fast-growing business. The vast majority of optical components companies, like those covered in this month's Internet Report, and optical networking companies are seeing sales grow in this rapidly expanding market.

A Weak Lineup
In the most recent quarter for which data is available, Nortel Networks increased its sales 34% and Cisco's sales grew 53%. That same study indicated that Lucent's sales fell 10%. When Lucent pre-announced in October, it stated that revenues from optical networking systems were down about 5%.

A company with declining sales in the optical networking market literally has to be tripping over its own feet. There have to be serious execution issues keeping it from getting its product out the door. Alternatively, the management team might not understand the market enough to develop the right products, or else they're marketing products improperly. Optical networking is a market with high demand and product shortages. In that environment a decline in sales is inexcusable.

In an environment where it seems that just about every other company with a place in optical networking has been banging balls out of the park, when they do connect, Lucent's hitters have been struggling to get the ball out of the infield.

It seems that Lucent missed the fact that its telecommunications customers would shift toward high-speed fiber optic products and away from traditional telephone switch networks.

Continue to Part 2  »