April 23, 2003
Q2’03
Conference Call Notes and Observations
Lucent Technologies, Inc.
6 Months ended March 31, 2003
please see Disclaimer at bottom of report
This report was last amended on April 23, 2003.
Lucent Technologies, Inc. designs and delivers networks for the world’s largest communications service
providers. Backed by Bell Labs research and development, Lucent, claims to rely on their
strengths in mobility, optical, data and voice networking technologies, as well
as software and services, to develop next-generation networks. Lucent, claims that their systems,
services and software are designed to help customers quickly deploy and better
manage their networks and create new, revenue-generating services that help
businesses and consumers.
Lucent Technologies financial release for 2nd quarter of fiscal 2003
Slide Show For Earnings Call
Notes From Conference Call
Pat Russo – Chief Executive Officer:
1. First time Lucent has recorded 30 % or more gross margins in over 10 quarters.
2. Increased revenues from prior quarter by 16 %. Net loss was $0.14.
3. Debt in convertible securities has been reduced by $1.6 billion.
3. Outlook of cash at end of year has improved to $ 2.5 billion ( previous guidance was $ 2.0 billion).
4. Headcount is 38,500 and expects to be 35,000 at fiscal year end.
5. Supply chain revamping is responsible for gross margin improvements.
6. Inventory turns went to 6.8 from 5.9 . Net inventory was carried at under $1 billion for the first time.
7. On time of delivery of systems and materials improved to strongest levels of history.
8. Revenue performance by no way is indicative of an industry upturn. The market has not recovered for revenue generation. Uncertainty continues to exist. Because of this market uncertainty, revenues are expected to be down 20 to 25 % for fiscal 2003 as compared to fiscal 2002. This is a reduction of prior guidance.
9. Lucent continues to target a return to profitability by the end of fiscal 2003. This projection does not include impacts of non-operational items, such as conversion of convertible securities.
10. Called the quarter successful and a “pivotal quarter”.
Frank D’Amelio – Chief Financial Officer
1. Revenues were 60 % domestic or $1,500 million compared to 40 % international or $ 952 million.
2. Global settlement of shareholder litigation, which resulted in a charge of $ 415 million in Q2’03. This is expected to be settled via a payment of $ 315 million in either cash or common stock, at the choice of Lucent. Proceeds are not expected to be distributed until F2004.
3. All restructurings are near completion. Reserves are being reduced. Most of the reversals seen this quarter were non cash impacting.
4. Mobility Solutions generated revenue of $1.3 billion. This was a 25 % sequential increase from last quarter. This was due to increased sales from North America and Asia Pacific region.
5. Integrated Network Solutions generated about $1.0 billion. The loss from this section was improved upon from last quarter because of costs and expense reductions.
6. Services Revenue was $ 415 million, with a 12 % gross margin. Services revenue declined by $53 million from last quarter. This reduction was result of lower installation revenue in INS and Mobility in North American Region.
7. Operating expenses were flat to prior quarters as restructurings are nearly complete. Higher provisions for Bad Debt and Customer financing were higher in second quarter. Research and Development were relatively flat at $ 382 million.
8. Days Sales Outstanding (DSO’s) decreased to 58 days from 64 days.
9. Vendor financing exposure continues to decline.
10. During Q2’03 , total debt and convertible preferred securities were reduced by $ 711 million. This was a result of the purchase of $ 345 million of 8 % Convertible Preferred, $ 380 million of 7.75 % Trust Preferred and $ 52 million of other obligations.
11. During Q2’03 Lucent exchanged 777 million of Convertible Securities and Other Debt for Common shares. Since initial trade in Q4’02, Lucent has exchanged over 1.6 billion in Convertible Securities and Debt obligations for 621 million common shares.
12. Cash usage for remainder of 2003 is expected to be another $ 900 million. This will include $ 300 million in restructuring, $ 400 million in ongoing operations and $ 200 million in interest payments.
13. US pension plans are not expected to be funded in 2003 or F2004. Current expectations are to fund $ 350 million for Post Retirement Health Care Benefits in 2004.
14. Lower than expected working capital requirements and continued operational improvements in the business, have increased the projected cash at year end to be $ 2.5 billion. The previous guidance was $ 2.0 billion.
15. Financially planning for revenues to be down 20 – 25 % from F2002. Breakeven levels have been reduced to a quarterly breakeven of $ 2.4 billion.
Question and Answers
1. D’Amelio explained that debt buy back was done via ” opportunistic trading “.
2. Paul Sagawa from Sanford Bernstein asked if tax benefits mentioned in conference call would have a positive cash effect in F2003. The answer from Lucent was that these tax benefits were $ 237 million, $ 22 million of which was cash received during the quarter. Some more cash from tax benefits, is expected in Q4’03, this amount was not quantified.
3. North American region is more challenged for the industry as opposed to other regions (this was mentioned by Russo).
4. Steve Levy from Lehman, asked if business model has changed for breakeven in terms of gross margins . Frank answered ” No”. Frank reiterated he expects 35 % gross margin by end of year.
5. Going forward , Royalty conditions and revenue recognition will fluctuate going forward. Most of the revenue from Royalties will ” drop through to earnings”. This quarter the amount was $ 69 M ( or 0.0175 per share), prior quarter was $ 16 M.
6. Lucent commented on their delaying commercial deployment of optical products. This was associated with Ultra Long Haul in market. This is a delay , not an elimination. There was an impairment charge this quarter for this delay and costs involved. This was a $ 50 million charge to gross margin.
7. Gross Margins in Services were down, due to lower volume. These were down from 14 % to 12 %. Service business is a longer type sell. Gross margin contributors were cost reductions, volume and favorable product mix ( volume and mix particularly in Mobility Solutions. Lucent is looking to grow in this growth area. Frank mentioned it was a 40 billion addressable market, growing at about 8 % per year.
8. Pension Credit increased because of elimination of a death benefit for retirees.
Some “ back of the envelope” financial observations
1. Current Ratio (Current Assets / Current Liabilities) is 1.40. The ratio was 1.48 at December 31, 2002. At December 31, 2001 it was 1.86.
2. Accounts Receivable increased $ 76 million from Q1’03, sales increased $ 328 M from Q1’03. If you project revenues to $9.6b B for F2003 (not our projection, just a “what-if “ argument) then A/R as a % of revenue would be 16 %. Accounts Receivable, as a % of Revenues was13.37 % in F2002, 21.57 % in F2001, 28 % in F2000, 29 % in F1999 and 23 % in F1998. Receivables appear to be managed properly, yet revenues are so low, that this ratio is not as valid. If Lucent ever reaches revenue stability, this ratio should prove to be a more useful indicator.
3. Inventory decreased $ 128 M. The decrease in inventory is a potentially good sign, as Lucent saw gross margins increase, even though inventory decreased ( a higher inventory would increase margins) .Again, if we extrapolate F2003 revenues to an arbitrary $9.6 billion, the Inventory/ Sales ratio would be 10 %. Inventory / Sales Ratio at F2002 was 11.06 %, F2001 was 17.12 % and 17.65 % in F2000.
4. Acid Test Ratio (CA- Inventory)/CL is 1.22. The ratio was 1.29 at December 31, 2002. In F2002 the ratio was 1.23, F2001 where it was at 1.22 and from F2000 of 1.01 and F1999 of 1.14.
5. Research and Development was $ 382 million, or 15.90 % of revenues. At December 31, 2002 it was 18.75 % of revenues. The last known guidance I can recall regarding R&D is that Lucent claims it will level out at 12 %. This was discussed by Lucent in 2001. I do not recall if it was discussed subsequently.
6. Flow Ratio is 1.11. The Flow Ratio is desired to be less than 1.25. Here is the formula : Current Assets = $ 7,741, Cash = $ 2,205, Current Liabilities = $ 5,522 and Short Term Debt = $ 271.
Flow Ratio = (CA – Cash) / (CL – STD) = 1.09. The ratio was 1.09 on December 31, 2002, 1.48 on December 31, 2001 , 2.85 at FYE2000 and 2.36 at FYE 1999.
7. Management Confirmed that a major restructuring is not being planned.
8. Total product revenue increased 24% to $2B from $1.6B in Q1 while total services revenue decreased 11% to $415 from $468 in Q2. The $372M increase in wireless products in Q2 was offset by a $55M decline in switching and access revenue while optical networking revenue was flat from Q1 at $174M.
9. Cash burn was better than we had expected. In our last report we discussed our concerns of the potential cash burn in this quarter. The reduced cash burn is attributable to gross margins increasing ( best in 10 quarters), DSO’s decreasing to 58 days and revenues rising 16 %. Capital expenditures were reduced to $ 33 million from $ 155 million in the last quarter. In Q1’03 , Lucent recorded a charge of $102 million for a Real Estate Lease Buy-out. This charge was included in the capital expenditures of $ 155 million in Q1’03. Hence, the comparable difference of capital expenditures was a reduction of $ 20 million in Q2’03 over Q1’03.
10. Lucent guided that F2003 revenues are projected to be down by 20 to 25 % from F2002. Revenues in F2002 were $ 12,321. The new guidance would bring the projected F2003 revenue range in the area of $9,241 to 9,857. Lucent previously guided revenues to be down by 20 % from F2002.
11. During the quarter, Lucent retired an additional $777 million in face value of preferred securities via the issuance of 310 million shares. This increased the total shares to 4,053,789,823.This equates to nearly 10% dilution in the quarter. Dilution will be watched for a while as preferred securities still exist on the balance sheet. The reduction of preferred securities and debt has reduced annual interest and dividend requirements by approximately $ 125 million.
12. Book Value is a negative number.
13. There was no current disclosure or discussion of SPE’s
Disclaimer
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