First, the news that everyone can enjoy: For the first time since 2000, Lucent remained profitable for an entire fiscal year. Hooray! For fiscal 2004, the company raked in revenues of just more than $9 billion, a 7% increase over its fiscal 2003 performance. Profits came in at $1.14 billion in total, or $0.25 per diluted share. The company even earned some cold, hard cash, collecting about $480 million in free cash flow. Finally, Lucent expects to continue its money-making ways in fiscal 2005, saying its growth should exceed the market average. (Until we hear projections from peers Ciena
In any case, Lucent projects revenue growth in the "mid-single digits."
Let's call it "5%." Then assume the company can maintain its 2004 margins next year (the company has made a marked improvement in both gross and net margins since 2003, with the former coming in at 42% and the latter at 12.7%), and apply those to 105% of this year's $9 billion in revenue. The result looks to be roughly $1.2 billion in net earnings for next fiscal year. That would equate to about $0.28 in per-share profits for next year, or about 10% earnings growth -- quite respectable.
Except that it's not going to happen. For this, you can blame that old foe of the Fool -- stock dilution. In Lucent's case, looking at the company's weighted average diluted share count for 2004 as compared with 2003, the company has already increased its average fully diluted shares by 22% over the course of the past year. Next year, it gets worse. The most recent weighted average diluted number reported by Lucent is 5.2 billion shares.
So let's run those profit numbers once more: Assuming Lucent's stock dilution screeches to a halt right this instant, we're still looking at 5.2 billion shares, assuming full dilution from stock options, convertible preferred stock, and so on. Divide the projected $1.2 billion in GAAP profits for next year and Lucent's owners can expect just $0.23 per diluted share in profits. Thus, through the magic of stock dilution, Lucent has in one instant proclaimed its return to profitability and declared its growth will exceed the industry average in fiscal 2005 -- then admitted to diluting itself into a probable decline in profits (for outside shareholders, at least) for next year.
Way to spoil the good news, Lucent.
For more Foolish musings on Lucent, read:
Fool contributor Rich Smith has no interest in any company mentioned in this article.