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Spotlight Shines on Lucent
Scott Moritz
Investors will be hoping for a little illumination from Lucent Technologies Wednesday morning. The Murray Hill, N.J., telecom equipment giant is scheduled to deliver yet another installment in its familiar saga to balance solid wireless gains with slipping wireline gear sales. Wall Street is eager to see Lucent's fiscal fourth-quarter numbers and even more curious about the company's year-ahead forecast.

http://www.thestreet.com/_htmlbtb/tech/scottmoritz/10249162.html

Same Old Story at Lucent

By Scott Moritz
Senior Writer
9/16/2005 1:51 PM EDT
Click here for more stories by Scott Moritz

Lucent (LU:NYSE - news - research - Cramer's Take) watchers are getting a strong wireless signal, but weakness on the wireline side is keeping the stock in check.

This lopsided story has been replayed for several quarters as telcos shift their spending toward cell phone networks and advanced Internet gear, and away from Lucent's old-line phone switches.
With two weeks left in the quarter, investors and analysts say they aren't expecting any major departures from the familiar script when the networking equipment giant reports quarterly earnings next month.

In fact, Merrill Lynch analyst Tal Liani predicts Lucent watchers will experience a little bit of deja vu in the coming weeks, as the company offers an update. In a research note Friday, Liani says consolidation, employee cuts and a $900 million tax refund should boost Lucent's earnings by about 3 cents a share in the coming fiscal year starting in October. Liani has a neutral rating on Lucent.

The cuts are part of streamlining effort that began earlier this year. To trim costs, Lucent is combining its slumping phone gear business with its growing wireless division. The Murray Hill, N.J., tech giant is also reducing the number of contract manufacturers it uses to two -- Celestica (CLS:NYSE - news - research - Cramer's Take) and Solectron (SLR:NYSE - news - research - Cramer's Take) -- from five previously.

Over the past year, Lucent has cut 1,000 employees, bringing its head count to 30,800 as of the end of June.

Lucent will also have about $900 million in extra cash to help cover restructuring costs and employee severance expenses, thanks to a massive tax refund and more than $80 million in accrued interest. The company took advantage of federal tax rules that allowed it to take massive losses from 2001 and deduct them from a prior-year profit.

Liani says the cost savings and positive impact from the tax rebate will likely provide Lucent with a brighter outlook when the company provides guidance for fiscal 2006 starting next month.

Still, Lucent watchers have seen this drama play out several times before, and they are reluctant to take any positive claims on faith.

"We remain skeptical of the company's wireline fortunes," Moors & Cabot analyst Matt Hoffman wrote in a Lucent note Thursday. In reiterating his neutral rating on the stock, Hoffman says doubts about Lucent's ability to coax some growth out of the nonwireless side of the business are "tempering our overall enthusiasm for the shares."

Lucent shares were down 4 cents Friday to $3.05, while telecom networking rival Nortel (NT:NYSE - news - research - Cramer's Take) was up 4 cents to $3.17.

But Lucent fans see a respectable pipeline of orders from outfits like Cingular, the wireless service provider co-owned by SBC Communications (SBC:NYSE - news - research - Cramer's Take) and BellSouth (BLS:NYSE - news - research - Cramer's Take). And financially, Lucent is on strong footing thanks to a $900 million tax rebate. The company took advantage of federal tax rules that allowed it to take massive losses from 2001 and deduct them from a prior-year profit.

The company has also cut 1,000 employees as of June and is expected to report that it has dismissed more of its 30,800-member workforce.

Lucent has been busy relocating a good portion of its software research and development to India and China. CEO Pat Russo is said to be very impressed with the progress on this front in India, according to one Lucent insider.

Analysts expect Lucent to post earnings of a nickel a share on sales of $2.46 billion. The much-watched gross margins are expected be around 44%. Anything below 42% will likely be seen as trouble, says Charter's Snyder. But similarly, if Lucent widens margins beyond 45%, it could mean good things for the stock.

Lucent shares rose 7 cents Monday to $3.15.

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