Telecommunications equipment company Lucent Technologies warns that its fiscal Q4 EPS will come in between $0.17 and $0.18, missing analysts' estimates of $0.27. While its optical and switching businesses continue to struggle, the company's concerns about credit problems in the emerging service provider market represent new worries for investors to contend with.
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For the period, the Murray Hill, New Jersey-based company is guiding investors to expect pro forma operating EPS between $0.17 and $0.18, down from last year's result of $0.24 and well short of the current First Call mean estimate of $0.27. This is the second downward revision for Q4 in three months for Lucent, which first lowered its guidance for the quarter back in July. At the time, analysts had been calling for EPS of $0.41 in Q4. With today's warning, earnings for the full-year will consequently come in around $1.00 per share. The bad vibes will also have an unspecified negative impact on results in fiscal 2001, according to the company.
In a rather short press release, Lucent blamed the shortfall in part on lower-than-expected revenues and margins in its optical and circuit switching businesses. These areas were also fingered in the July guidance revision and have been an anchor on the company's performance for most of this year. Switching system sales will be down 13% from a year ago while revenues from optical networking systems, including optical fiber, will be down 5%.
As far as the optical space is concerned, Lucent's management has previously acknowledged that the firm is paying the price for missing a product cycle. Thus, it appears that the Q4 problems are a continuation of the punishment and shouldn't be viewed by investors as indications of new cockroaches emerging at Lucent. But while not new, the problems are apparently taking longer to exterminate than the company had previously imagined.
However, a new item did crawl out of the woodwork in today's warning. On top of the optical and switching systems shortfalls, the company said it is increasing its reserves for bad debt due to credit concerns in the emerging service provider market.
This certainly isn't good news for investors who have become accustomed in recent years to looking at the telecom services and equipment sectors as two distinct universes, at least from a stock market valuation point of view. With Lucent now opening Pandora's Box and, in effect, publicly stating that some of its vendor financing for service providers may be in trouble, a conduit has opened for the carnage that has taken place in the competitive local exchange carrier (CLEC) space recently to seep further into the telecom equipment sector.
The vendor financing issue is a serious one that investors in Lucent and other equipment firms should spend more than just a few moments pondering. As alluded to in a recent article by fellow Fool Bill Mann, debt implosions have a nasty way of surfacing quickly and reverberating throughout those sectors that lie in close proximity to the epicenter. With that in mind, it's probably not a bad time to reiterate that article's closing thought, "Be very careful out there, dear Fool."
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