October 22, 2003
Q4'03
Conference Call Notes and
Observations
Lucent Technologies,
Inc.
12 Months ended September 30, 2003
please see Disclaimer at bottom of report
This report was last amended on October 22, 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.
Notes From
Conference Call
Pat Russo - Chief Executive Officer:
1. Fiscal 2003 book closing should be the close of the chapter for the pain of Lucent and the industry. Industry remains challenging, but believes bottom is in. Focus is in top line, managing bottom line and achieving profitability, which should occur in F2004. Premature to call recovery, but seeing stability and pockets of opportunity. Sees pockets of opportunities in areas like services, metro optical, VOIP, broadband access and high-speed wireless data. First profitable quarter since March 2000 ( If my fingers and toes are correct, that was 14 quarters).
2. Revenues increased 3.0% sequentially from prior quarter. Positive segment income in Mobility and Wireline.
3. Revenue not yet recognized from revenue delay mentioned last quarter. Pat mentioned that all is going well with that deployment and feels strongly that revenue will be recognized.
4. Margins up significantly at INS and Mobility.
5. Starting to see impact of increased sales in higher margin Next Generation products.
6. "Impressive accomplishments in last 12 months."
7. Significant optical portfolio wins, including AT&T. Metro optical is where growth is being seen. Optical business had "very strong quarter".
8. Broadband access is strong, especially in Europe. Mentioned major access win in Canada last week. SoftSwitch and VOIP is strong. VOIP professional services is seeing opportunity and a great future market. Pat discussed later in the day on CNBC that Lucent is committed to VOIP.
9. Tough year for Mobility and Wireless, but feels that difficulty is behind Lucent. Mentioned China Unicom, Verizon Wireless, Sprint and Korea Telecom. Conducting UMTS interoperability tests in China. Expects to make UMTS contract announcements from Europe soon.
10. Like Frank, Pat has warned that quarterly results will be lumpy in near future.
Frank
D’Amelio
1. "Good numbers and good quarter."
2. US Revenues flat. 60% domestic and 40% international. Readers need to keep in mind that currency fluctuations and the weak US dollar may have distorted results in a positive fashion. This was not mentioned in the call, but the weak dollar and its positive affect on US companies, is something that we have been observing in our economic research.
3. Earnings include negative impact of asset impairment charge related to capitalized UMTS software development costs. Also includes negative impact of warrant revaluations from shareholder lawsuit. These costs were offset by the positive impact from customer financing and bad debt recoveries.
4. Restructuring plans are essentially complete. Half of the reversal impacted gross margin.
5. Re-assessed the value of previous UMTS capitalized software costs. Charge of $50M was recognized in R&D.
6. US Pension plans do not expect any contributions in F2004. Expects to contribute $300m to $350M in 2004 for Health Care. A non-cash charge to equity of $594m was recorded. This relates to the management pension plans. This resulted in a reversal of $165m of previously recognized income tax benefits.
7. Mobility Solutions revenue was $856M. This was a sequential increase of 4%.
8. First quarter of operating income for INS since the change of segments over 2 years ago. INS revenues were $1.11B, an increase of 5% sequentially.
9. Lucent Worldwide Services (LWS) were $460M or an increase of 5%. Related primarily to higher margin maintenance services.
10. Gross margin increased sequentially by 14 percentage points. Gross margin increased to 43% from 29%. Increase was from favorable product and services mix and continued cost reductions.
11. Emphasized future investments in Voice Over IP.
12. Goodwill impairment of $35M.
13. Capital Spending was $65M. Cash used for business restructuring was $95M.
14. Repurchased $500M of convertible securities and debt obligations. This will result in an annual reduction of $50M in fixed charges.
15. More than $2.1 billion of convertible and debt obligations have been bought back or exchanged in the last year. Cash used was $487M for the fiscal year and common shares exchanged were 621M. This action resulted in $130M reduction in annual interest and dividend requirements.
16. Annual revenues were down 31% from prior year. Most of decline was due to decline in spending by US Service Providers. Services Revenues were down from $2.7B to $1.8B. Mobility Solution revenues were down from $5.5B to $4.0B. INS Revenues were down from $6.2B to $4.2B. Total expenses were down $5.6B.
17. Working Capital declined by $600M in F2003.
18. During F2003 employee headcount was reduced to 34,500. Lucent at its peak had 106,000 employees. At the end of F2002 headcount was 47,000.
Question and Answers
1. Question on Gross Margin going forward. After a lengthy discussion, which didn't say a heck of a lot, in terms of going forward, the gross margin of 34 to 35% was emphasized. We will project this amount going forward.
2. Question as to break even with a gross margin of 35%. Hence, taking out bad debt , vendor financing expenses. You will see that quarterly breakeven is about $2.2 billion. Again, Frank emphasized lumpiness of costs and revenues , quarter to quarter. Frank mentioned that the $2.2b could be improved upon.
3. Frank expects that Services will get to a 25% gross margin and then be improved upon. Pat added that operating margin should be 10 to 15%. She mentioned that margins increase at latter end of contracts. This will become more evident as business grows and matures.
4. Revenue Guidance for F2004 is flat to slightly up from F2003.
Some “ back of the envelope” financial observations
1. Current Ratio (Current Assets / Current Liabilities) . The ratio was 1.60 at June 30, 2002, 1.40 at March 31, 2003, 1.48 at December 31, 2002 and at December 31, 2001 it was 1.86.
The following table lists prior Current Ratios :
September 30, 2003 1.56
September 30, 2002 1.40
September 30, 2001 1.60
September 30, 2000 2.00
September 30, 1999 2.10
September 30, 1998 1.50
September 30, 1997 1.20
September 30, 1996 1.20
2. Accounts Receivable decreased $109 million from Q2’03, sales increased $62M from Q2'03. 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.
Accounts Receivable Turnover ratio (Sales/Average Accounts Receivable). On the face, this has shown improvement. Just another metric to watch.
The following table lists prior Accounts Receivable Turnover Ratios :
September 30, 2003 5.6
September 30, 2002 3.9
September 30, 2001 3.2
September 30, 2000 3.3
September 30, 1999 3.3
September 30, 1998 3.8
September 30, 1997 5.4
September 30, 1996 3.1
3. Inventory decreased $174M. 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 F2004 revenues to an arbitrary $8.5B, the Inventory/ Sales ratio would be 7%. Inventory / Sales Ratio at F2002 was 11.06 %, F2001 was 17.12 % and 17.65 % in F2000.
Inventory Turnover ratio (Cost of Sales/ Average Inventory) . On the face, this has shown improvement. Just another metric to watch.
The following table lists prior Inventory Turnover Ratios :
September 30, 2003 6.6
September 30, 2002 4.3
September 30, 2001 4.1
September 30, 2000 3.7
September 30, 1999 3.7
September 30, 1998 4.2
September 30, 1997 4.9
September 30, 1996 2.8
4. Quick Ratio (CA- Inventory)/CL . On the face, this has shown improvement. Just another metric to watch.
The following table lists prior Quick Ratios :
September 30, 2003 1.44
September 30, 2002 1.20
September 30, 2001 1.20
September 30, 2000 1.50
September 30, 1999 1.60
September 30, 1998 1.10
September 30, 1997 0.90
September 30, 1996 0.90
5. Research and Development was $335M, or 16.50% of revenues. If you take out the $50M charge to R&D for the UMTS capitalization charge, you would have a ratio of 14% 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 believe that management intends on keeping the ratio in the 15% range.
The following table lists prior Research and Development to Sales Ratio :
September 30, 2003 16.50
September 30, 2002 18.75
September 30, 2001 16.53
September 30, 2000 11.00
September 30, 1999 13.10
September 30, 1998 15.05
September 30, 1997 11.54
September 30, 1996 11.59
6. Flow Ratio is 0.72. The Flow Ratio is desired to be less than 1.25. Here are the givens : Current Assets = $7,833, Cash = $4,507, Current Liabilities = $5,015 and Short Term Debt = $389.
The Flow ratio is similar to the Cash ratio, except it includes a reduction of short term debt from current liabilities. It is similar to the Quick Ratio.
Flow Ratio = (CA - Cash) / (CL - STD) = 0.72. 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. Interesting to notice an improvement in this ratio over the last few years. Since the industry and company are in a depression, I do not believe that definite relevance can be established. On the face, it does look like financial management is being optimized.
The following table lists prior Flow Ratios :
September 30, 2003 0.72
September 30, 2002 0.76
September 30, 2001 1.52
September 30, 2000 2.85
September 30, 1999 2.35
September 30, 1998 1.69
September 30, 1997 1.36
September 30, 1996 1.26
7. Total Asset Turnover Ratio is ( Sales/ Total Net Assets). Generally, the higher the multiple, the more efficient the company. The industry standard, which I have quickly , unofficially and haphazardly appears to be between 0.80 to 1.10. Like other ratios here, this is merely a ratio to watch.
The following table lists prior Total Asset Turnover Ratios :
September 30, 2003 0.54
September 30, 2002 0.69
September 30, 2001 0.63
September 30, 2000 0.61
September 30, 1999 0.76
September 30, 1998 0.83
September 30, 1997 1.16
September 30, 1996 0.70
8. Gross Margin (Cost of Sales/Sales).
The following table lists prior Gross Margin Percentages :
September 30, 2003 31.3%
September 30, 2002 12.6
September 30, 2001 15.3
September 30, 2000 40.5
September 30, 1999 48.0
September 30, 1998 46.9
September 30, 1997 44.5
September 30, 1996 41.4
9. Operating Margin Percentage ( Operating Income (loss)/Sales). I believe that Lucent's ultimate goal is a 10% to 15% margin.
The following table lists prior Operating Margin Percentage :
September 30, 2003 ( 0.03)
September 30, 2002 (54.40)
September 30, 2001 (90.50)
September 30, 2000 9.40
September 30, 1999 14.00
September 30, 1998 8.00
September 30, 1997 5.80
September 30, 1996 3.10
10. Net Profit Margin Percentage (Net Income (Loss)/Sales). I believe that Lucent's ultimate goal is a 10% margin.
The following table lists prior Net Profit Margin Percentage :
September 30, 2003 (13.70)
September 30, 2002 (96.98)
September 30, 2001 (76.20)
September 30, 2000 4.20
September 30, 1999 17.70
September 30, 1998 4.40
September 30, 1997 1.60
September 30, 1996 1.40
11. Return on Equity (ROE) Net Income/Equity . There are more thorough ROE formulas, such as "The Dupont Formula", but for this, we will use the simple calculation.
The following table lists prior ROE :
September 30, 2003 N/A
September 30, 2002 N/A
September 30, 2001 N/A
September 30, 2000 6.10
September 30, 1999 44.30
September 30, 1998 19.20
September 30, 1997 14.80
September 30, 1996 10.90
12. Long Term Debt to Equity .
The following table lists prior Long Term Debt to Equity :
September 30, 2003 N/A
September 30, 2002 N/A
September 30, 2001 29.70
September 30, 2000 11.60
September 30, 1999 29.90
September 30, 1998 31.20
September 30, 1997 49.20
September 30, 1996 60.80
12. Times Interest Earned Ratio . This ratio measures the ability to meet interest payments. Formula is Earnings before Interest and Taxes (EBIT)/ Interest Expense. This is also referred to as the "Interest Coverage Ratio".
The following table lists prior Times Interest Earned Ratio :
September 30, 2003 (18.40)
September 30, 2002 (17.50)
September 30, 2001 (37.40)
September 30, 2000 7.90
September 30, 1999 13.00
September 30, 1998 14.40
September 30, 1997 7.10
September 30, 1996 2.70
13. Total Liabilities to Total Assets Ratio .
The following table lists prior Total Liabilities to Total Assets Ratio :
September 30, 2003 121.41
September 30, 2002 117.20
September 30, 2001 61.80
&nbs