Lucent Technologies, Inc.

Notes

LU

 

 

 

 

January 20, 2006

 

Lucent has become a very small position of mine. It has also been a surprisingly modestly profitable position for us. Anyway, I think it makes up less than 2% of all portfolios. SYNA fyi is between 3 - 5% (and I'm having a blast today, i hope she becomes a teenager again). I also own 1% in a POS called LNOP :-) Oh, and I own a ton of Ciena.

With that said, I haven't studied Lucent's optical situation in a while. It is my understanding that IP is very much a focus. You can read some of my old Lucent stuff here http://www.rbcpa.com/companies/lucent.html . I'm amazed that it has been over a year since I posted on it.


here are some quick cut and pastes, which i think will show that LU is certainly focused on IP. They have always realized the certain death of PSTN.

LU on 11/11/05 analyst conference

" In the optical and data convergence space, our next generation platforms have we think give us a good position to expand and grow. In broadband access, we support IPTV on the Stinger platform. And that's paying dividends. We're finding environments where we are an incumbent, maybe not the sole incumbent, but as video becomes more important our customers are coming to us because of our video capability. That's been very positive."

" In the optical and data area, we see continued emphasis and support for Ethernet. We think that's a significant demand driver, if you will. And so in a more traditional business for us we think we're going to see an increased use of optical systems instead of ATMs and things like wireless backhaul. Our great advanced applications drive more bandwidth and more traffic.

In broadband access, we believe that IPTV rollouts will accelerate worldwide. And the operators will deploy those technologies that -- as you've already seen the partnering with content providers. And then when you add IMS to the mix, we think service providers are going to be focused over time on delivering what we call a Grand Slam of fixed and mobile voice data and video services that really can redefine the way we access entertainment, information and communicate simultaneously."

For F2005 (9/30/05) Lucent had $817M of Optical Networking Revenues, this was up from $756M in F2004 and $760M in F2003.

For F2005 LU had Data and Network Management revenues in excess of $850M, down from $925M in F2004 ane $1B in F2003.

Voice networking continues to fall as expected. Currently at $889M for F2005.

*************************************************************

When Lucent warned earlier this month, i said to myself "oh fupk, here we go again". Difference being I am much lighter now on Lucent and in the real world :-) Warning is presumed to be in mobility solutions and not IP.

Annual revenues are still expected to be over $9B.

Optical networking revenues are still expected to be up mid single digits this year.

Lastly, LU was recently hired by BT Group for their IP network. I don't think BT Group would hire a company that was not advanced and competent in the IP field.

" Lucent Technologies Inc. and BT Group announced that they have signed a contract for new technology that will sit at the heart of BT's all-Internet protocol (IP). Lucent will help BT deploy a more efficient core network that will enable it to offer customers a diverse set of feature-rich services including voice, broadband, Ethernet, virtual private networking (VPN) services and IP VPN as well as supporting established packet data capabilities such as Asynchronous Transfer Mode (ATM) transport services, over the MPLS core."

With that said, I ain't as thrilled with Lucent now as I was in 2002, when I was quoted in Business Week at $0.74 per share.

http://www.businessweek.com/technology/content/oct2002/tc20021023_9924.htm

"Lucent still has some die-hard fans. Some analysts, including Sanford Bernstein's Paul Sagawa, who predicted the current telecom crisis, believe Russo can pull off a turnaround -- if the market for telecom equipment stops dropping. Indeed, some institutional investors are betting on it. Ronald Redfield, portfolio manager at Redfield, Blonsky & Co. says he holds Lucent shares and would advise any new clients to purchase the stock.

STEERING CLEAR. However, even he admits: "We've seen WorldCom and others claim there's plenty of liquidity, and then they go bankrupt within weeks. [Lucent is] doing what it needs to be doing, but there might be no possibility of getting out."

 

December 1, 2004   Unauthenticated Russo comments on UMTS Cingular Win

 

November 30, 2004

Dear Colleagues,

Today, we announced our first commercial UMTS contract win in North
America, and everyone should feel good about this significant
accomplishment. Congratulations.

The strategic agreement calls for Lucent to supply third-generation
(3G) UMTS network equipment, software and services to support
Cingular's nationwide 3G service rollout. Following this deployment,
Cingular will have one of the world's largest and most sophisticated
UMTS networks.

This is a huge win for Lucent. We now have a UMTS reference account
with a customer that will soon be the largest mobile operator in
North America.

Winning a commercial UMTS contract was one of Lucent's top priorities
for 2004 and 2005, and a key component of our five-year strategy for
long-term growth. And we did it. It's a major milestone for us!

Hundreds of Lucent people had a hand in this win - from the global
Mobility and Bell Labs teams that designed, developed and tested our
UMTS solution; to the Lucent Worldwide Services and Supply Chain
Network teams that deployed and managed Cingular's successful network
trial in Atlanta; to the Cingular customer team, finance team,
Mobility, LWS and INS teams who worked together to develop the
project proposals and negotiate the contract.

With the Cingular UMTS deployment and the other major customer wins
we have achieved this year, we have been building momentum. As we
move forward, it's important to build on our progress by winning
more and executing with excellence the wins we have.

Again, congratulations and thank you for a job extremely well done.


Pat Russo
 

 

November 16, 2004 

 

1.    It was reported on Reuters that Lucent may have a wireless deployment with Cingular.  This would be a UMTS upgrade.  This is also known as WCDMA.  This would be Lucent's first WCDMA contract. 

 

2.    We have read that this contract could be $350M for CY2005.

 

3.    Neither Lucent nor Cingular have made announcements here.  This solely came from a Reuters article.

   

 

October 21, 2004     Note to Employees from Pat Russo, discussing earnings release for 4Q03. This has not been authenticated, we are not responsible for any errors.

 

********************************************************
LUCENT TECHNOLOGIES TODAY NEWSFLASH
Wednesday, October 20, 2004
********************************************************

In This Issue:

* A Message from Pat Russo

********************************************************

Dear Colleagues,

This morning we reported results for the fourth quarter,
and our first profitable year since fiscal 2000. This
is an outstanding achievement, reflecting your focus on
growth opportunities in the marketplace and solid execution
in every part of our business.
Thanks to your efforts, we generated revenues of
$2.40 billion and net income of $348 million, or 7 cents
per diluted share for the quarter. And we reported
$9.05 billion in revenue for the year, up 7 percent from
fiscal 2003.
Lucent's journey back to sustained profitability has
taken us through some very difficult times. But we have
persevered, remained focused, and frankly, this year,
achieved more than we thought possible! We have now
delivered profitable results for five consecutive quarters,
and that is remarkable given where we had been in the
telecom market. There are numerous milestones that
contributed to our results this year. The year-over-year
perspective is outstanding.

WHAT WE ACHIEVED

* Grew revenues 7 percent year over year -- our first
year of revenue growth since 2000.
* Improved gross margin by 11 points, from 31 percent
to 42 percent.
* Significantly improved earnings, generating earnings
of 25 cents per diluted share for the year compared
with a loss of 29 cents per diluted share in fiscal
2003.
* Dramatically improved our cash position, generating
$634 million from operations this year versus using
$948 million last year -- a swing of almost $1.6 billion.
* Announced more than 100 customer wins in 35 countries.
* Announced 18 new products, 10 new technology partnerships,
as well as the acquisition of Telica to enhance our
offers for converged networks.
* Improved our Customer Loyalty Index by about 5 percent,
placing Lucent above the competitive average.
* From a shareowner value perspective, our stock
appreciated during the year 47 percent -- from $2.16
on Sept. 30, 2003, to $3.17 on Sept. 30, 2004.

These results are terrific and speak for themselves.
I want to thank every one of you for your steadfast
commitment, firm resolve and determination this year.
I hope you're as proud as I am of what we've achieved.
As always, we should all celebrate our significant
progress. At the same time, we know that we have more
to do. It is important for us to continue to improve
our productivity and efficiency, as our market becomes
increasingly competitive. And we have been working to
expand our customer base both outside the United States
and in the government and services arenas. This work
must accelerate. With regard to customers, we want to
create true strategic partnerships with them as they
plan, design, optimize and literally transform their
networks to next generation. And we must continue to
be unrelenting in our focus on managing our cost and
expense profile, as we drive even greater efficiency
across the business.
Looking ahead, we said we expect the market -- and our
business -- to grow again in 2005 as our customers continue
to invest in deploying more efficient, revenue-generating
network services. We are seeing the beginning of the next
generation of investment in networks, and there are some
pockets that are very strong opportunities for Lucent.
Clearly, the Mobility sector remains a key growth area
for us as service providers continue to move to 3G
networks for high-speed data services. On the wireline
side, we will continue to see a move to broadband access
and new IP-based infrastructures and applications. We'll
continue to focus on areas for growth like next-gen
optical, VoIP and broadband access, while we navigate
through the significant transition from circuit switching
to packet that is occurring in that segment.
The communications industry is entering what we expect
to be a relatively long period of transformation as the
need for convergence of networks and the emergence of
blended applications are creating the ability to deliver
more personalized, seamless and simple communications
services for people at work, at home or in between.
We intend to be the thought leader and ultimately the
market leader in this next-gen convergence. We have
communicated a clear vision of the future that supports
the goals and objectives of our customers, and we are
delivering a broad portfolio of products, services and
partnerships that we believe will meet those needs
across the board. We're encouraged by the discussions
we're having with customers around the world about our
IMS architecture. And we're gaining traction across
parts of this architecture. During 2004, we developed
and introduced 10 new products that support our common
platform approach to IMS across our entire wireline and
wireless portfolio. And we have numerous IMS customer
trials, including 16 trials and seven deployments at
the applications layer, 10 trials at the session control
layer and six trials and a large number of deployments
at the media/endpoint layer. It is important to remind
ourselves that it will take time to realize volumes of
business in this arena. Our focus is on positioning
with our customers now.
In closing, I want to thank you again for your hard
work in helping the company return to profitability.
This gives us operational leverage in every dimension
of the business -- and has created a foundation for
continued growth and success in the future. We're
off to a good start, and with your continued focus and
dedication, we'll continue that momentum in '05 and
beyond.

Sincerely,

Pat

*********************************************************
 

 

 

September 21, 2004   The following is a copy of the complete text of Gilder Technology Report www.gildertech.com  one page review of Lucent.  We found what we thought were quite a few misstatements of facts in that report.  We specifically asked for permission to share the article and received permission from the author to do so.  Here is an excerpt of where we asked.

 

I wrote to author, Charles Burger on 9/20/04  " I respectfully request that you give me permission to share your Lucent one page report to other competent industry professionals and Lucent experts (both of professional and non professional nature). i once asked that previously, and you all mentioned that you would be happy to call my contacts. I am not interested in sharing contacts with you on this matter, at this point. I am also not interested in private emails sent to me by sandy on this matter. if you or GG would like to personally contact me, i have no objection there.

I think that your discussion, would be a great catalyst for clarification. It would be easier for investors, scientists, industry analysts, to see your report, as opposed to only seeing my discussion of it. Rest assured that I respect GTR, GTF a great deal, and would not share such a report without permission.

well, back to work on my analysis of your presentation."

 

He posted back on the same day, " You may share my analysis with anyone you wish. I am flattered,  actually, since I am not a CPA or CFA or financial professional of
any stripe.

 

Here is the unabridged text as follows:

 

 

1. Report written on 9/20/04 by Charles Burger from GTR.

" Now that Lucent Technologies (LU) is a
leading supplier of CDMA and 3G infrastructure,
some of our readers have asked us if are we
ready to re-embrace this former favorite of our
Telecosm list. Perhaps we can even celebrate the
company as evidence for a return of the boom
days of yore. After all, over the last two quarters
it has claimed $664 million of operating
income.
On the GTR list of telecosm companies
from the opening gate, we touted Lucent in the
late 90s for its apparent commitment to WDM
and for its first-to-market broadband fiber
(AllWave). After its sale of many of its paradigmatic
technologies (including its fiber business)
to raise desperately needed cash, we dropped
Lucent in 2001. Lately, however, the company
seems to be recovering steadily in its remaining
wireline, services, and wireless businesses, managing
to turn an operational-cash-flow loss of
$1,900m/yr in June 2003 into a cash-flow gain
of $440m/yr in June 2004. Wow. Since annual
revenue has been flat during this period at about
$8.7b, where's the cash coming from?
Not from services, which includes mostly
low-margin product installation and development
and which contributed just 16% to
operating income in the June 2004 quarter
(compared to 182% a year earlier when everything
else produced losses). Nor from wireline,
where revenues have decreased from $812m in
the June 2003 quarter to $715m in the current
quarter. With an operating margin of
9.5%, wireline contributes just 14.3% of
operating income.
Which means the winner is … wireless,
where quarterly revenue over the past year
increased from $624m to $986m (or from 31%
to 45% of total revenues), with operating margin
increasing from minus 7.9% to plus 33.4%.
Wireless now contributes a whopping 70% to
Lucent's operating income.
So, now we love Lucent, right? Well, we still
have to answer the question: Is Lucent primarily
a paradigm investment or is it a bet on something
else? We applaud the developing CDMA
scenario, but like many dramas, the Lucent
story has more than one act.
With the curtain barely opening on the second
act, the news is already bad: Lucent's retiree
benefits and pension plans are under-funded by
about $7b. Based on financial and actuarial
vagaries, projected discount rates and retirement
schedules, these estimates are about as reliable as
multi-decade weather forecasts or Keynesian
economic astrology. Based on the benefits
accrued as of today, the account is overfunded,
even after cash payments to current retirees. So
Lucent isn't paying anything in to the fund
despite the portentous future projections.
So, maybe we, along with Lucent, should
just pretend the future isn't coming. But we can't
do that, because the future is now in the form of
an accounting trick. Since the current account
balance is positive, Lucent gets to add fictitious
(noncash) pension credits to its operating
results. Remove the bogus bucks, and the latest
quarter's operating income drops from $349m
to $72m, and March's sinks from $315m to a
loss of $38m. Uh, oh, there goes our Telecosm
celebration. Despite its claim to the contrary,
Lucent is still losing revenues and struggling at
operational breakeven. Unfortunately for
Lucent, unless markets turn bullish very soon,
the pension credits will begin to vaporize. That's
because expected returns on post-retirement
benefits are partly based on past-year returns,
which still include the last bull market. The last
bull will start to exit the equation shortly.
Forgoing applause for Lucent's second act
and its anerobic financials, we now raise the
curtain on Lucent's remaining legacy products.
Wireless still contributes less than half of
total revenues, with a third going to wireline,
where steep declines in circuit-switching revenues
continue. To fight these declines,
Lucent is hoping for a revival in ATM sales,
progress in VoIP softswitch revenues with the
recent acquisition of Telica, increased sales in
network-edge switches, and major contract
wins in optical networking and switching
where its LambdaXtreme and LambdaUnite
compete with Ciena's CoreStream optical networking
system and CoreDirector optoelectronic
switch. Lucent recently beat out Ciena
at Verizon where it will build the RBOC's
next-generation long-haul network.
With the curtain still up on this third act,
we ask if Lucent can beat the clock on legacy
losses. Lucent may have answered the question
for us: The company projects that revenues
over next year or so should remain steady or
increase slightly by about 5%, that gross margin
will be flat to down from its current low
40s to the upper 30s, and that operating margins
should remain flat to down by as much as
5% (meaning operating losses after subtracting
the pension credits).
For the finale, we tackle valuations. In the
short- and mid-term, liquidity is not an issue;
working capital for the past year has held steady
around $2.5b and reported book value is almost
$10b (not counting pension costs), consisting
mostly of tangibles and long-dated debt maturities.
However, add in postretirement-benefit liabilities
and book value falls to negative $3b.
Similarly, the recent share price of $3.34 is a reasonable
16x estimated fiscal 2004 earnings,
until you subtract the phony pension credits
and discover that earnings disappear.
Substituting the enterprise-value-to-sales ratio
for PE, we get a lofty 3.5 compared to the average
of 2.2 for Lucent's wireline competitors; for
Lucent, an EV/S ratio of 2.2 is equivalent to a
stock price of 67 cents.
Now, to answer our question: What does an
investment in Lucent mean? It means you are
betting that CDMA, VoIP switches, and semioptical
networking will win out over bogus
accounts, legacy equipment, and languid
bureaucracy. If you want to bet on CDMA, why
not go to the best technology company in the
world (Qualcomm) and invest without the risk
of legacy liabilities and old-world thinking?
Then again, if you want to invest in next-generation
networks, Corvis is truly all-optical and
comes without vagaries and bogus credits. And
if you want to invest in VoIP, call your local
cable company and try it out for yourself.
—Charles Burger
Do We Love Lucent Now?"

2. Here was my response. Keep in mind that Charlie did respond back, without at all contradicting my writings. Charlie is an awesome writer, and either one of us might have made an error on this one. I could be wrong on many or some of the issues I mention. I don't think I am, but that is the purpose of such a discussion. Here is my response.

" Hi Charlie,

Part 1

Of course, I enjoyed your Lucent report, and most of it sounded correct. A few glaring errors or omissions I saw, during a quick read.

1. You were quite sarcastic about the financials. Well deserved of Lucent, because of their past history with SEC, fraud, mismanagement, etc. Yet, GTR has the same history. I have said from day one, that you all should trumpet your talents and competencies. GTR advertises that they gave investors 100%+ profits in 2003. Probably a very true statement. They fail to even slightly mention that had an investor started with them in year 2000, they would still probably be down over 70%. Such investments that no longer exist are Loral, Global Crossing and Exodus. Others that tanked big time are Corvis, and then Avanex (remember when GTR claimed that to be the lower risk investment).

2. You mention that Lucent Worldwide Servicses (LWS) is not contributing to cash flow. Can you indicate where you arrived at that assumption. You also mention on page 5, beginning of paragraph 3 the following: "Not from services, which includes mostly low margin product installation and development". Here are some facts about LWS:

a. LWS consists of professional, maintenance and managed services. These services for the first 9 months of F2004, grew over 10% from 2003. LWS and Bell Labs is developing a Lucent Security Portfolio. LWS goal is Value over IP. Their goal is to first get into a network via services. For example, being hired to perform a network audit. They call this "Services First entry strategy". They then attempt to find a long term presence in a network.

b. Lucent understands that by nature LWS is lower margin, primarily because they are professional services. They also are generating a currently unquantifiable amount of revenue, future revenues and industry respect, via working on LWS jobs, that at this point have zero or little of Lucent optical, broadband or wireless components of a companies communications portfolio.

c. LWS a rather new entrant to Lucent, claims that the addressable market is $43b

d. You mentioned that June quarter operating income was substantially lower than the year before. You did not mention that revenues were up both YOY and previous years quarter. Again, I do not know where you found this information. I see in the 10Q where Lucent claims that LWS segment income is up $17M for the quarter ended June 30, 2004, compared to same period 2003. Year over Year, LWS operating income is up $77M. You compared LWS operating income as a greater share of the pie in 9 months ended F2003. That is correct, but you fail to educate the reader, that Lucent's recent claim of profitablity only occured during last fiscal year. You claim that LWS does not contribute to cash flow, where indeed, they certainly seem to. They may have been the only profitable segment last year at this time, hence the appearance of greater operating income.

3. According to industry sources and Lucent (you can find this at http://www.lucent.com/investor/fac04.html Lucent can claim the following:

a. global leader of CDMA - market share is nearly double of number 2.

b. LambdaUnite recently named number 1 in optical switching market.

c. Number 2 in worldwide DSLAM ports.

4. You discuss that wireline revenues are shrinking. I wont challenge that comment, but lets face it, that is hardly a company specific phenomenam. You also realize that wireline includes optical, LH, ULH and Metro. We all know that the market is lumpy. Lets wait a few more quarters, or see where competition is growing dollars in a different fashion than Lucent.

5. Wireless is strong, like you said. Also subject to risks if a slowdown exists.

6. You correctly mention that Lucent retirees benefits are unfunded by $7B. Of that $7b, $6.2B is tied into future health care benefits of retirees. That contract is up for renegotiation in October. Lucent has well under 17,000 union employees ( i have seen claims of under 3K now). On the other hand, Lucent has over 100,000 retirees (inherited from ATT). The leverage of a strike and an unfair resolution to Lucent is less now than ever before. Let's see how negotiations with Union and Lucent go the next few months. This is not an easy situation for Lucent (who wants to do the right thing) and Union (which understands Lucents pain, needs, but also the needs of its members).

Lucent does not seem to be involved with actuarial gimickry as you alude to. These are complicated and not necessarily logical erisa and dol rules. Look at the financials and the 10K disclosures, to see further discussion.

You mention that Lucent is paying anything into the fund. It is my understanding that there was a VEBA trust set up to self fund the ATT retirees. This fund did not last as long as intended. Should waste away during the next 18 months, give or take only a few months based on market conditions.

You sarcastically mention that perhaps investors should just pretend this doesnt exist, just like Lucent. If you ever listened to Lucent presentations, this is an item that is hardly brushed under the table. You understand that Lucent inherited true "legacy costs". Imagine if you were working to give your family 20% and old unknown founders 80%. You wouldnt like it. And based on your philosophy, you would at worst case to the founders, look for an amicable and fair solution. That solution would be a compromise to the both of you.

You distort by saying that Lucent adds fictituous pension credits, in the form of an accounting trick. They are reporting based on GAAP. If they reported any other way, it would be incorrect accounting. If you look at any of my Lucent reports, you will see that I clearly state that pension income should not be included in the valuation of Lucent. It is required presentation, but also leads to quality of earnings issues. Again, Lucent points this out during most if not all earnings and updates.

Part 2



7. You sarcastically mention “telecosm celebration” ending as a Lucent investor sees that when looking at earnings quality, that Lucent continues to lose money. Competent Lucent investors should already be aware of that . I gave a presentation on Lucent on Saturday, to a group of around 15 or so investors. The quality of earnings issue , retirement plan issue, and many other real and potential negatives were discussed. I urged any potential Lucent investor to understand these issues, or at least to have a coherent knowledge of the great risks involved. You can see this presentation at this link http://www.rbcpa.com/companies/lucent3Q04.html

You mentioned that unless the market turns bullish , the pension credits will disappear soon. No matter what, as I mentioned before, these credits will disappear. They are part of a wasting trust. No matter what these credits have a limited life. You are missing the concept and as a reporter, you are in essence causing a form of FUD.

You mentioned “anerobic financials”. You might want to check the spelling before you mail the issue. No biggie, as my grammar and site is filled with spelling errors. I guess you meant to say that Lucent financials are without oxygen (anaerobic). I don't fully disagree, but that is for a later discussion and based on future results. Your Corvis love, also has non existent financials when it comes to its life as an equipment company. In Corvis we can see a history of questionable revenue flows , limited and bankrupt customers, claims that never happened and a purchase of Dorsal post crash, which to show arms length accounting, presented pre-crash metrics.



8. You mention that Lucent if fighting declines in revenues in circuit switching. Lucent is fully cognizant of this, and includes that rapid deterioration in their future guidance. This has been acknowledged for quite a while now by Lucent. Voice networking for 9 months ended June 30, 2004 decreased by $217m, whereas optical revenues increased by $58M. Of course a net deficit, but nevertheless, IP revenues growing is a positive sign. Keep in mind that the growth is organic and not acquisition related. Lucent's customers (service providers) are feeling the same decline in voice related revenues. Hence the emphasis by Lucent on IP, VoIP and convergence.

9. You mentioned that Lucent is fighting the declines in voice by hoping for a revival in ATM sales. Is that accurate. Are you familiar with the CBX 3500? http://www.lucent.com/products/solution/0,,CTID+2015-STID+10470-SOID+1562-LOCL+1,00.html This is an area, where I certainly leave my competence in the men's room. My understanding is that Lucent is looking for the CBX 3500 to leverage existing frame relay and ATM services over an ATM core (is that well said for someone who has no idea what an ATM or frame relay is J ). I hardly have taken away from any analysis or meetings that Lucent is hoping for ATM to be revived. My take is that their focus is on IP technology and partnering when necessary to offer an effective solution to the telecom providers. I think the CBX 3500 allows for IP/MPLS solutions over either a legacy network with ATM or a pure IP network. I could be real wrong on that. Am I incorrect, or is this solution, if it is successful, the exact opposite of what you claimed about Lucent and ATM.

10. You mentioned that “Lucent projects revenue over next year or so should remain steady or increase slightly by about 5%”. That is hardly accurate information. Lucent's guidance is the following. “ Expect annual revenues to increase on a percentage basis in the mid single digits for Fiscal 2004”. FYI, fiscal 2004 ends for Lucent on September 30, 2004. The guidance I quoted was given on September , 2004. You indicated that Lucent guided for a year or so, when indeed they mentioned that F2005 guidance will be given in October. Lucent has maintained that they expect revenues over the longer term future to meet or beat the industry CAGR. You can read their most recent guidance at this link http://www.lucent.com/investor/pdf/fac04_06.pdf

11. You mentioned that Lucent Gross Margins will be flat to down from its current low 40's, to the upper 30's. Lucent during its last conference call or two, mentioned that margins were tracking a bit higher than should be guided. I forget those issues as to why, I think restructuring and another slightly unusual issue. Hence, as margins were increasing, they continually reminded us what margins were being guided at. This is hardly bringing gross margins down. They also clearly mentioned that this guidance is near term guidance only. Gross margins as a % of revues were 10% in F2001, 13% in F2002, 31% in F2003.

12. You mentioned that operating margins were guided to flat to down 5% (and you mentioned pension credits). Lets get the facts correct. Lucent clearly identifies the pension credit effect, and how operating margins need to be adjusted downward, when doing projections. With that said, Lucent mentions, “expect quarterly operating expenses to be around $700M in the near term”. Please let the readers know where you got your information from. Here is the Lucent clearly states this about operating margins. “ continue to expect to report a full year of profitability for fiscal 2004”. I have no issues in you projecting your own views and thoughts, but I find it amazing that you claim that Lucent has guided towards your words. They absolutely have not guided as such.

13. Lucent has continued to state that their ultimate mid term goal is operating income of 10 to 15%. They ultimately hope for higher, but for now, that is their first goal. They have incorporated the wasting pension credits in all of their guidance.

14. You mentioned working capital liquidity. You failed to mention the following.

a. Balance sheet is getting stronger. Lucent debt was recently upgraded by Moody's. Debt is still lower grade, nevertheless the picture is improving. Debt has been upgraded to B2 (highly speculative) from Caa1 (Substantial risk). Here is a link on our site, which has a table on debt ratings.

b. Cost reductions, debt buybacks and stabilizing revenues have helped make Lucent a stronger company. Unlike mid 2002, they do not appear to be an immediate or imminent bankruptcy contender. Here is a link on our site, where we discussed the deterioration of Lucent bonds during 2002. Lucent short term bonds were selling for nearly $0.30 per share. The same bonds are now trading over par.

c. Lucent has been consistent with their strategies over the last 3 years. They recognized and openly discussed their solvency issues. They laid out a game plan of restructuring and goal of liquidity. So far they have achieved those goals. More recently they have laid out a framework for continued profitability. Here is a link of ours, which details much of Lucent's financial history since 2001.

d. Lucent bought back or recapitalized over $2.2B in debt since the fiscal fourth quarter of 2002. Fixed charges will be reduced by about $150M due to this.

e. Lucent took a charge to their deferred tax asset during 3Q02. This was done in accordance with SFAS 109. There has been recent industry talk that Lucent will be able to bring this asset on the balance sheet again. The prior write off was in excess of $5B. If the valuation allowance was materially reduced, Lucent would once again have a positive tangible book value.

f. Lucent recently announced that they have been approved for a tax refund in the area of $1B (including interest). Lucent previously recorded a receivable of $139M. A $1B unanticipated inflow, will be quite positive for Lucent.



The above was all taken from my report written the other day http://www.rbcpa.com/companies/lucent3Q04.html



15. You mentioned valuation analysis. I wont dig deep into that. Liquidation value is tuff to conceptualize, because we don't know the value of any real estate, we don't know the guaranteed payment of retirement plan obligations other than pension, once negotiations are finished, we don't know value of goodwill with Bell Labs. You can see guesses I have put together on potential valuations at this link http://www.rbcpa.com/companies/lucentmodel091604.html These are merely guesses, and at best I am using it as a current road map, which could change at any time.

Anyway, I just wanted to point out a few quick things. Ultimately, Lucent can hit the ground and declare bankruptcy. Again, I have not disputed your economic value or your valuation scenario. I merely dispute some of your methods, words, creation of FUD, allegations and misinformation.

Again, I respectfully request that you give me permission to share this one page article, when indeed you all write over 100 pages per year, with other investors, scientists, analysts etc. Hence, the board and me will benefit from potentially competent arguments that could correct either one of us or both of our thoughts or conclusions. I am hardly perfect and I apologize for any inadvertent errors I may have written.

Peace,

Ron"

Charlie wrote back a real nice note. I dont have to post it here. He mentioned a few issues, but did not dispute anything I wrote. Perhaps he is formulating an answer and maybe show me that I am materially wrong in my writings and interpretations. here is what charlie wrote. again, I have always enjoyed his work and his style.

" Ron,
Thank you for your post and reading the report so diligently. Much
appreciated!
You set up a straw man when you talk about past performance of the
GTR and the advertising. I dislike the ads very, very much and have
nothing to do with them -- I do not own the business. I am an
underling. In my previous stint at the GTR (through Aug 2002) I did
tech analysis exclusively -- no financials. I have taught myself
financial analysis over the past year by reading texts and by doing
(and making mistakes -- lots); a guy has to figure out how to make an
income somehow, especially with 8 children. Well, I guess I am
agreeing with you on the ads and past performance stuff.
You may share my analysis with anyone you wish. I am flattered,
actually, since I am not a CPA or CFA or financial professional of
any stripe. By the way, I do not doubt that LU is reporting according
to the rules; GAAP accounting is very confusing with respect to
pensions and I still think the whole thing is deceptive.
The point is that I think there are better ways to invest in the
technologies and markets that LU represents. If I had money to
invest, I would not want to wait around for union negotions if I did
not have to.
I am sorry that you find GTR financial reporting incompetent; as I
said, until the past few months I had nothing to do with it. Since
then, if I have failed already, it is surely time for me to start
looking again. Oh well, maybe next time I'll earn enough to actually
invest! (Never can tell.) :).
Best,
Charlie

 

 

April 8, 2004   Notes on Current Analysis write up of UMTS

 

Current Analysis is a subscription service, which is available at www.currentanalysis.com  .

 

Current Analysis did a report dated April 8, 2004 on UMTS/GSM.  Because of time allotment, and perceived immateriality of cut and pasting sections of this report, I took the liberty of supplying direct quotes from the report.  We normally supply interpretations, but felt this data might be useful to technologically oriented Lucent watchers. 

 

Current Analysis did label Lucent's current perspective in this area as "negative/neutral",  status as "emerging", surprisingly calls Lucent a "2nd tier vendor", momentum as "negative" and vision as "neutral/positive"

 

Here is a link to Lucent's UMTS W-CDMA solutions.

 

Here are notes of the report

 

" The GSM/UMTS Radio Access Network market consists of access equipment deployed by mobile operators to deliver mobile wireless Wide Area Network (WWAN) services to voice and data subscribers using licensed RF spectrum.

Key components of any Radio Access Network include the Base Transceiver Station (BTS), Base Station Controller (BSC), and Mobile Switching Center. The BTS (also known as the node B in UMTS terminology) sits on the edge of a wireless operator’s network and provides wireless connectivity with end-user terminals. BSCs (Radio Network Controller – or RNC – in UMTS terminology) manage and aggregate BTS traffic while MSCs groom wireless traffic onto the Public Switched Telephone Network (PSTN) and perform key signaling and mobile handoff functionality. The GSM air interface is a Time Division Multiple Access (TDMA) family of technologies developed as a second generation (so-called 2G) successor to the fragmented European analog systems of the 1980s. 2.5G improvements over GSM include GPRS and EDGE. GPRS is a packet-based system yielding data transmission up to 114 Kbps with typical user rates around 20-40 Kbps. EDGE is envisioned as a “stepping stone” from GPRS to UMTS which yields spectral efficiencies and data rates up to 384 Kbps with typical user rates over 100 Kbps. As GSM upgrades, both GPRS and EDGE can make use of existing GSM infrastructure and spectrum, though base station radio upgrades are required for the new functionality. Legacy GSM terminal equipment and services, however, remain supported.

In contrast, UMTS is a wideband Code Division Multiple Access (W-CDMA) technology designed to be the third generation (3G) successor to the GSM digital systems. CDMA-based radio interfaces utilize spread spectrum techniques to attain efficient utilization of the spectrum. A common signaling system is shared between GSM and UMTS to allow handovers from one type of system to another.

In some markets, GSM/UMTS mobile operators must compete with services based on CDMA and CDMA2000 technologies, one of several successors to the North American analog standard called AMPS. However, while CDMA2000 operates in the same narrow 1.25 MHz spectrum channels as older IS95 (cdmaOne) CDMA systems, the new UMTS W-CDMA-based systems use 5 MHz (wideband) channels. At the same time, GSM and its derivatives are the #1 global mobile wireless standard deployed in over 190 countries. As a result, GSM-based networks benefit from strong support for roaming and tremendous handset diversity.
 

 

" AT&T Wireless and Cingular Fuel Merger Mania: Fighting off a number of real and supposed competitors, U.S. GSM operator Cingular Wireless announced its plans to acquire AT&T Wireless on February 17th for approximately $41 billion. Mobile operator consolidation has often been cited as inevitable. However, Cingular’s move represents one of the first major moves in this direction, breaking an important psychological barrier. The merge of spectrum removes a roadblock to U.S. WCDMA deployments, creating an opportunity for infrastructure suppliers. This opportunity is only heightened by Cingular’s need for a competitive differentiator in the face of AT&T Wireless’s hemorrhaging customer base and Verizon’s EV-DO plans."

" UMTS Moves Forward: Driven by licensing requirements and the improved availability of WCDMA devices (PC cards, at least), European operators finally seem poised to move forward with their long-promised UMTS launches. While vendor shakeups are not unheard of, most operators have already picked their UMTS suppliers, promising an uphill battle for everyone else"

" • Lucent should stress that PC cards are already the most compelling and appropriate UMTS device on the market. As with any new technology, the obvious demand for UMTS services today is in the enterprise, making the PC card a natural fit (as proven by its deployment in most recent UMTS launched across Europe). Even when mass market UMTS usage gains momentum, laptop users will still be a major 3G constituent meaning that PC card will still prove useful"

" Lucent and Nortel should stress their HSDPA capabilities and position HSDPA as an integral part of any UMTS launch. Both vendors have had their greatest successes in North America…a market in which HSDPA could prove important as a competitive reaction to EV-DO launches. Early momentum with HSDPA could allow them to capture a greater share of North American deals, and potentially leverage this success into new markets."

" Lucent should stress the cost efficiencies of deploying UMTS outright. Any operator upgrading their network to EDGE today, must then consider future upgrades to UMTS and then to HSDPA. Each step involves CapEx and OpEx costs. Unless an operator is incredibly spectrum challenged, skipping EDGE allows them to immediately enjoy CDMA efficiencies while setting them up for HSDPA. For the U.S., in particular, HSDPA will be an important tool to combat EV-DO services from Verizon"

 

March 25, 2004   Notes on Current Analysis write up of Lucent's DSLAM Portfolio

 

Current Analysis is a subscription service, which is available at www.currentanalysis.com  .

 

1.    Lucent announced contracts worth greater than $300M on March 17, 2004 . 

 

2.    According to Current Analysis, Lucent had several new Stinger platforms on display at CeBit.  One being the Stinger Compact Remote .  Also micro-remote terminal 2 (MRT-2)  and the mid-size (MS/MS+) platform (of which I could not find a link).  The MS+ platform

 

3.    Claims that recent European wins (see link above) and the new additions to the Stinger family, Lucent has provided validation for its DSL solution set.  Claims that Lucent has "strongly reiterated its ongoing commitment to the DSLAM market.  Claims that this is the 3rd enhancement to the Stinger portfolio since October 2003.

 

4.  Calls the Stinger line, "stealthy" and they see Lucent as positive in this area.  Thinks Lucent is remaining silent and stealth like, since the competitors have been publicly dissing Lucent over the past year and a half.  They believe that Lucent will discuss the Stinger line only when contracts are announced. 

 

5.  Claims the European wins provide Lucent with market validation for its DSL solution set. 

 

6.    Claims Lucent is deploying its Stinger DSLAM platforms throughout the Telekomunikacja Polska Neostrada network.

 

7.    Claims that Bell Canada is having the Stinger Compact Remote platform installed.

 

8.    Lucent's market share in the DSLAM market has dropped almost two points, from 9.1% in CY02 to 7.3% in CY03 according to Synergy Research Group.  Current Analysis discussed that market share declined because of "overall market growth", not because Lucent sold fewer units.  Claims that Alcatel is the world leader of the DSLAM market and the Huawei is second largest.  They mention that European competition is fierce.  Competition includes Siemens, Marconi and ECI Telecom.

 

9.    Mentions that North American SP competition is ADTRAN, AFC, Alcatel, Allied Telesyn, Calix, CIENA, Net to Net and Zhone.  Mentions a few more, which I did not post.

 

 

 

 

 

January 23, 2004   Note to Employees from John Meyer, discussing earnings release for 1Q04 and LWS.  We have not verified the authenticity of this letter.

 

 

Subject: LWS NEWSFLASH: Quarterly Letter from John Meyer



To the LWS team:

The first quarter of fiscal '04 is behind us, and we are already
one-third of the way into the second quarter. On Wednesday, Lucent
announced its second straight profitable quarter and an 11 percent
increase in revenues for the quarter to $2.26 billion with overall
gross margins at 41 percent.

LWS revenues for the quarter were $466 million, a decrease of 1
percent from last quarter and a decrease of 4 percent compared with
the year-ago quarter, but $32 million over our plan. We continue
to see pricing pressure on the NAR Deployment space that is partially
offset by growth in the Maintenance and Professional Services.

We had some strong customer wins this quarter:

-- Telemar of Brazil selected LWS to operate and maintain its
switching, optical and data access equipment.

-- Imtech Telecom selected LWS to manage and monitor Eurofiber, a
large fiber network in northern Europe.

-- LWS maintenance, deployment and professional services were also
major components in many other contracts, including Qwest,
Verizon, CODETEL, Portugal Telecom, and Bell Canada.

With respect to the Customer Loyalty Index, we continue to post
strong results. Our CLI reached 7.56, exceeding both our goals for
the quarter and the year, as well as the competitive average of
7.20 and best-in-class score of 7.55.

There are lots of positives. But as I said earlier in my New Year's
Resolutions, we need to gain a more prominent position in Lucent's
overall growth. We need to take on the challenge of becoming the
growth engine for Lucent.

One of the most important factors in any businesses' success or
failure is communications. We need to ensure that all 11,000 of us
understand and are able to tell the "LWS story" to our customers,
other Lucent employees and industry watchers. It is essential we
speak with one voice and have consistent messages. So in the coming
weeks we will be rolling out a campaign to ensure all LWS employees
can "Walk the Services Talk."

I recently talked to one of our most senior employees, who was
leaving Lucent due to the business requirement for a permanent
relocation out of state. It was a sad conversation, but it offered
some important lessons. He detailed numerous ways that we could do
the job better, and pointed out problems like ineffective equipment
delivery, people not taking their jobs more seriously or wasting
company resources. He finished by saying he felt comfortable telling
me all this since "he was leaving anyway."

Too Late.

If you know a more effective way to do something, or if you know
anyone who is not delivering or who's performing poorly, do something
about it. We are all responsible to tackle these issues. Take some
leadership, get angry, confront the situation and get it fixed. This
is not a game, and our lack of competitiveness in certain areas is
costing jobs and hurting people.

Don't be a victim - be an owner!

In LWS, we have everything we need -- the people, resources,
leadership team and reputation -- to be the industry's No. 1 Network
Integrator.

Now we have to go out and do it.


Stay Tuned,

John Meyer

 

October 22, 2003   Note to Employees from Pat Russo, discussing earnings release for 4Q03.

 

********************************************************
LUCENT TECHNOLOGIES TODAY NEWSFLASH
Wednesday, October 22, 2003
********************************************************

In This Issue:

* A Message from Pat Russo

********************************************************

Dear Colleagues,

Today is a day to feel proud. We achieved a significant
milestone. Thanks to the incredible efforts of every
individual at Lucent, we reported our first profitable
quarter since March 2000 and we generated positive
operating cash flow.
This doesn't represent the work of just one quarter.
It's the culmination of three years of your hard work
and dedication.
When we told investors in July that we were unable to
affirm that we would return to profitability in the
fourth quarter and that we would achieve a return to
profitability in 2004, I challenged you to do everything
possible to lower costs, improve efficiencies and achieve
the revenue levels that would support returning to
profitability in this quarter. And you did. It was the
combination of those efforts that delivered profitability
and positive cash flow in the quarter.
In a market where spending continues to be tight, we
recorded revenues of $2.03 billion, a 3 percent increase
over last quarter. We posted net income of $99 million,
or 2 cents per share -- a 9-cent improvement over last
quarter. And we generated positive operating cash flow
of $145 million.
We achieved a 14-point improvement in gross margin to
43 percent -- a terrific team achievement that was due to
the great work by the folks on the Supply Chain Networks
team and the folks in the product and services businesses.
In addition, a favorable mix of products and services --
as well as your continued focus on reducing costs --
contributed to the margin improvement. This margin
improvement helped us achieve profitability this quarter.
We reported revenue increases in every segment of our
business. For the second quarter in a row, Integrated
Network Solutions logged an increase in revenues --
5 percent over last quarter, and Mobility Solutions
revenues increased 4 percent sequentially. Our Services
business revenue grew by almost 5 percent for the second
quarter in a row, and we continued to expand our Global
Business Partner program. And while our U.S. revenues
were flat at $1.2 billion, our international revenues
increased 7 percent to $820 million.
We also exceeded our customer satisfaction targets.
Our results are the highest they have been in five years,
and surpassed the competitive average.
And, looking back over our fiscal year, there is
striking progress to acknowledge. Since October 2002, we:

* Reduced our total expenses by $5.6 billion;
* Improved gross margin by 18 points;
* Reduced our operating loss by $6.8 billion;
* Reduced our net loss from $11.8 billion to $770 million;
* Decreased our working capital by $600 million;
* Penetrated new markets with about $250 million in managed
services contracts;
* Established a clear leadership position in metro optical;
* Established strategic partnerships with Juniper and Cisco
and extended our relationships with Sun Microsystems and
EMC; and
* Introduced a host of new products, including the 5E-XC(tm)
high capacity switch, Flexent(R) OneBTS(tm) CDMA2000 base
station and Metropolis(R) DMXplore Access Multiplexer.

There were many great efforts throughout the business
that contributed to our results AND I'LL TALK MORE ABOUT
THEM ON THE ALL-EMPLOYEE BROADCAST TOMORROW. I'LL ALSO
TALK SPECIFICALLY ABOUT WHAT THESE RESULTS WILL MEAN TO
COMPENSATION. I hope you will join us tomorrow whether in
an auditorium or cafeteria at your location, on the Web or
on the phone.

LOOKING AHEAD

At this point, we have essentially completed our major
restructuring initiatives and implemented plans to broaden
our revenue base in areas such as services, government
contracts and outside the United States. I am not implying
that our work to return to profitability is complete. The
key for us is to sustain profitability over time. And we
still have a good deal of work ahead of us. We must grow
our top line while assuring that our cost and expense
structure supports profitability.
In the current challenging market environment, it is
likely we will still have some ups and downs on the way to
sustained profitability. So, like any business, there will
be adjustments as we respond to the market. We expect to
have both additions and reductions in our workforce as part
of the normal operations of our business going forward. And,
as always, we will continue to focus on managing our cost
and expense profile, while we increase our investment in
certain new product areas.
I mentioned earlier that our margin improvement helped us
reach profitability this quarter. While the margins represent
significant progress, a good deal of which is sustainable,
we do not expect to maintain this level for the year due to
anticipated quarterly shifts in product and geographic mix
and having fewer favorable items in the future. And while
we are not giving specific guidance for our next quarter, we
expect to achieve sustainable profitability some time in
fiscal 2004 at a margin rate of about 35 percent. We also
expect revenues to remain essentially flat or to increase
slightly year over year. And although we are seeing some
signs of stability in the overall telecom market, our most
challenging task -- for us and for our industry -- will be
top-line growth.

CREATING NEW POSSIBILITIES

Over the last six months, the senior leaders in Lucent and
I have been developing a five-year strategy aimed at growing
our business for the long term. We looked at who and where
we want to be in 2008 and worked a comprehensive plan to get
us there. Many people from across the company have had a
hand in developing this plan, and we further refined it at
our Officer and Executive meeting in early September.
I'll talk more about the strategy during the broadcast
tomorrow and your leaders will be talking with you over the
coming weeks about your role in making it a reality. The
fact is, we are in a new stage in our business. We have
weathered the telecom "storm;" the worst is behind us and
we have made remarkable progress by any measure. Our
attention must be on winning in the marketplace, driving
top-line growth all the while assuring that we sustain
profitability and positive cash flow.
We have defined a longer-term vision and plan for the
company. We have a stated purpose: CREATING NEW POSSIBILITIES
TO ENHANCE PEOPLE'S LIVES BY TRANSFORMING THE WAY THE WORLD
COMMUNICATES. We have defined a set of aggressive strategic
outcomes and I am excited by the prospect of what we can
achieve together.
In closing, let me again thank you and congratulate you
for the incredible job you have done this year and for the
last three years. I know it has been a long and difficult
journey. There have been bumps and unexpected twists and
turns along the way, but thanks to your dedication and
perseverance, we have come very far. We have farther to
go, as always, and I look forward to continuing our journey
together as we work to create new possibilities.


Sincerely,


Pat

*********************************************************

 

October 22, 2003

 

 

Someone emailed me this from Changewave.com . I have not explored this in depth, but it seems to make for interesting reading.

 

ChangeWave Insight

Lucent (LU) Reiterate

(4) (Sell)



10-22-03





Lucent (LU) announced profits yesterday - a surprise for the street - due solely to cost cutting topping $5BN. The company reiterated a view of a profitable 2004 characterized by flat revenue growth and a continue focus on managing gross margins and costs.

LU had sales of $2BN in Q3, an increase of 3% over Q2 and a sharp drop from the $2.8BN in sales registered in Q3 2002. The company reported a surprise profit, the first in 14 quarters with net income for the quarter of $99MM or $.02 EPS.

Pat Russo, head of the company, said 2004 would be flat to a little better on the top line with some bottom line growth as well. She saw pockets of growth in metro-optical, broadband access, voice over IP and wireless equipment, paralleling our surveys of the industry throughout the year. Her CFO said gross margins, quite high at 42% in Q3, would decline in 2004 and probably average 35%.

Despite cost cutting, the company is still fundamentally unsound due to the unwillingness of management to withdraw from certain equipment markets and product line weakness in many of the growth areas specified by Russo. A telecom equipment survey completed this Monday evening shows a stagnant industry with the pockets of growth outlined by Russo and a very negative view on Lucent. Almost half of respondents see Lucent as the continuing big loser in the telecom equipment industry over the next 12 months.

That being said, cost cutting efforts have worked as planned and the company is solvent enough to survive flat revenues for at least a couple of years. The success of this cost cutting and growing signs of stability are prompting us to change our rating to (4) (Sell) on Lucent.
 

 

 

July 31, 2003

 

 

Here is a short summary on WI-FI from a friend :

802.11a/b/g - Wireless Ethernet; for pc to network connection.
replaces Ethernet as link to LAN. Not suitable for WAN, users share capacity.
unlicensed RF

802.16 - T1 replacement, fixed wireless, designed for static high speed
links; replaces T1, not suitable for plenty of mobile users. Uses some
unregistered and plenty of registered spectrum.

802.20 - 4gen mobile; high speed (3-4 M downlink), designed fro mobile
users, will handle roaming nicely. Speed like DSL/cable modem; behave
like a mobile phone (you can drive and retain connection). Uses licensed
bandwidth - this same like mobile phones. Can provide voice services as
VoIP. Considered a next gen for mobile phones industry - cheaper than
GSM/CDMA/W-CDMA-CDMA2000 in rollout and usage.
 

 

 

July 23, 2003

 

A Letter from Pat Russo to Lucent employees,  dated July 23, 2003

 

Dear Colleagues,

        This morning we announced financial results for our third
     fiscal quarter and, as expected, we recorded revenues of
     $1.96 billion, a sequential decline of 18 percent from the
     previous quarter.  While the revenue decline is clearly
     disappointing, we made progress in a number of other areas,
     and I want to highlight them here so none of us loses sight
     of what we've accomplished.  

     *  First, our net loss for the quarter was $254 million, or
        7 cents per share, compared with a loss of $351 million
        or 14 cents per share in our second fiscal quarter, and
        a loss of $8.03 billion or $2.35 per share in the year-ago
        quarter.  Clearly, we've come a long way in a year.

     *  Second, we continued to see the impact of our cost reductions,
        and this helped us post a gross margin of 29 percent.   
        Our ability to maintain this level of gross margin in spite
        of a significant revenue decline shows the progress we've
        made in this important area..     

     *  We also achieved slight revenue increases in Services and
        in every product unit in INS.  And we used only a modest
        amount of cash in the quarter.  With the $1.6 billion we
        raised with our convertible debt offer, we ended the quarter
        with $4.9 billion in cash and short-term investments -- more
        than sufficient liquidity to fund our operations and business
        plans.

        These points of progress speak to the effectiveness of our
     restructuring actions, and to the hard work and many long hours
     you have spent supporting our efforts.      
        Over the past few quarters we had made clear progress and were
     building momentum.  With this quarter's revenue, I would say that
     we hit a speed bump, for sure.  It's disappointing, but not
     something we can't overcome.  As we said last week, virtually all
     of the decline quarter over quarter was a result of two specific
     issues in the mobility business -- reduced spending in North
     America and an unexpected network acceptance delay with a customer
     outside the United States.  Without question, we are working with
     the customer to get the necessary acceptances so we can recognize
     that revenue as soon as possible.  
        While we have been working hard on the cost and expense side,
     we have also been working on pursuing new revenue opportunities.
     I have talked about our increased focus on Services, business with
     the U.S. government and going to market through and with business
     partners.  I am pleased to say that we are seeing some positive
     indicators in these areas we have targeted for growth.  Our focus
     on Services led to the $100 million managed services contract with
     Telecom New Zealand to manage its 3G mobile voice and data network
     -- a huge vote of customer confidence in our capabilities.  
        Our aggressive efforts to win more government business led to
     a $50 million contract with the U.S. Department of the Army for
     network integration and professional services..  In addition, we
     have submitted proposals to the U.S. Department of Defense for
     the GIG-BE project -- its all-optical network expansion.   
        Our partnerships and alliances with companies like Juniper have
     allowed us to play more broadly in data networking and we now have
     more than 50 Global Business Partners selling our products to smaller
     service providers and enterprises, helping us expand our reach
     beyond the top global service providers we serve directly.  We've
     also submitted a bid for the Verizon/BellSouth/SBC
     fiber-to-the-premises project that blends our technology with that
     of partners.
        Yesterday we announced a $1 billion multi-year contract to upgrade
     Sprint PCS's nationwide 3G wireless network.  This is a terrific win
     for the wireless team.  
        Our focus on customer satisfaction continues to produce
     improvements, with our on-time delivery for systems increasing to
     97 percent and on-time delivery of materials-only improving to 87
     percent.     
        Looking forward, we are continuing our practice of not providing
     quarterly revenue or bottom line guidance.  Having said that, I want
     to assure that we are all aligned around doing all we can to get
     back to profitability as quickly as possible.  As I said last week,
     I believe it is possible for us to achieve the revenue levels that
     would support returning to profitability in this quarter.  It is
     without doubt a difficult challenge ... but possible.  All of you
     have done incredible work over the last couple of years to get us
     back on the road to profitability, and I am asking us to team to do
     even more.  
        No matter where you are in the company, focus on doing everything
     you can to help advance our revenue, cost, expense and customer
     satisfaction efforts.
        If our sales teams -- with support from the product teams --
     can achieve the high end of the range on revenue, we could achieve
     profitability in this quarter.  Bob Warstler has asked our sales
     teams to step up to the revenue challenge of getting close to the
     June 30 outlooks.  Let's do all we can to support the sales team
     in this effort.  Let's drive hard to win known sales opportunities,
     capture new business and get it recognized this quarter.
        We've made outstanding progress in reducing our product and
     services costs -- work to bring those costs down even more.  Look
     at every dollar of discretionary spending with the hardest
     possible eyes -- ask yourself if you truly need to spend it.  If
     it is not necessary to meet a customer need or other critical,  
     urgent requirement -- don't spend it.
        Returning our business to profitability by the end of this
     quarter would be a significant accomplishment and go a long way
     toward boosting our credibility and our own sense of progress.  
     I believe that we can do this and do it in a way that is
     consistent with our values.  
        While we are working hard to grow the top line, we are
     responsibly developing plans to further reduce our breakeven,
     which continues to be necessary given the current revenue levels.
     We'll be focusing these efforts in four areas:  improving our
     overall processes and systems; continuing to find ways to reduce
     our cost structure; lowering our interest and dividend payments
     through our recapitalization efforts; and continued expense
     prioritization.     
        I know that uppermost in your minds is how these actions might
     affect jobs.  Our target has been to reduce our headcount to
     35,000 employees by the end of this fiscal year, and that hasn't
     changed.  It is too early to say what kind of impact our breakeven
     plans will have on headcount beyond that, but we will take a
     balanced approach as we determine what is doable and necessary.   
     Be assured that every action we are taking is designed to ensure
     that we are in the best position to serve our customers' needs when
     the market returns.
        In closing, let me again thank you for everything you do every
     day to serve customers and return our company to profitability.  As
     I said earlier, we cannot let this "speed bump" throw us off our
     course or slow down our momentum.  While the market remains
     uncertain, our resolve to return to the company to financial health
     does not.  You've done a lot of great work to get us to this point,
     and have done so in what has been the longest and deepest downturn
     in the history of our industry.  That alone speaks to your dedication
     and tenacity, and I thank you for it.  But our work isn't over and
     we'll need all of that and more as we work to bring our company back
     to sustained profitability.      
        I'll talk more about our results and our plans during tomorrow's
     broadcast, and I look forward to talking with you then.


     Sincerely,  
 
     Pat    

 

 

March 6, 2003

 

 

Interesting link we found with Lucent mention. Click here  .  We are not responsible for the information or potential of misinformation in the text or link.

 

 

 

February 1, 2003

 

Cisco Relationship - More Information

 

We wrote on January 27, 2003 (see below) about the recent Cisco alliance. This will try to clarify a few of the issues.

 

    1.    The Cisco MGX8000 series will replace the Lucent's PSAX 4500  platform in mobile deployments.  The PSAX 4500 will continue to be used in wireline applications.  The MGX8000 is designed to provide higher capacity voice aggregation with an eye towards migrating from voice over ATM to VoIP  as mobile networks evolve towards all - IP architectures. 

   

    2.    The more we read on this relationship , the more we see how important it is.  Prior to this announcement,  Lucent lagged in a full end to end solution in the migration to 2.5G and 3G systems ( due to the cancellation of the Springtide platform). Lucent appears to have given the message to customers and prospective customers the message, that if the Lucent solution is not feasible, then Lucent will go out and find and deploy that feasible solution.  Lucent is known as having one of the strongest wireless capabilities, and this alliance sure seems to add just another strength.  This relationship should assure customers and prospects that Lucent will deliver a full end to end solution, while at the same time let all know that Lucent will continue to focus its development of its core competency in mobility solutions.

 

    3.    This venture does not offer exclusivity to Cisco. Lucent has teamed up with a known and trusted name with Cisco, yet at the same time Lucent can look to work with other vendors in their pursuit of quality end to end mobility solutions.  The Cisco MGX8000 is not without its weaknesses and Lucent can look to conquer those weaknesses with other alliances since the deal is not exclusive.  For that matter, Cisco can improve upon its weaknesses to deliver core competency to this product and its Lucent specific applications. 

 

    4.    This appears to be a positive venture for Cisco as well.  It gives Cisco the foot in the door with a company that still does a run rate of  $ 8.20 billion in revenues (Lucent).  It is interesting to look below at our November 7, 2002 note on Cisco and Lucent rumors.  Chambers (CEO of Cisco )was questioned on the potential of a Lucent buy-out by Cisco at that time and he responded,  " While I never say never...it's as close as I can say to that".

 

 

 

 

 

 

January  27, 2003

 

Capex thoughts

 

In reviewing some Capex figures for BellSouth and AT&T,  I am reminded to watch the revenues. Right or wrong, I am using a Capex/ Revenue ratio for the telecom of 10 % - 15 %.  BellSouth has guided towards 15 % in F2003.  AT&T projects 2003 Capex to be down 13 % from 2002.  AT&T commented that they expect conditions for Long Haul equipment vendors to remain challenging in 2003. 

 

Stinger Stuff

 

Current Analysis came out with a report on January 24, 2003 which was incredibly complementary to Stinger FS and FS+.   They call the product "very threatening" .  Current Analysis goes on to mention that although Lucent closed its Westlake Stinger office, they still have generated substantial customer wins following the closing.  Stinger has over 100 customers, including Qwest, Sprint, France Telecom, Nextlink, Telefonica and others.  I have read that a competitor of Lucent in several areas, is having trouble competing with the Stinger series.

 

Miscellaneous Notes

 

    1.    I was happy with the revenue numbers. Still concerned with long term viability without a restructuring ( ie killing of the common shareholders). Many of the analysts felt the results fell below expectations (i.e. AG Edwards)

 

    2.    Gross margins being increased due to shifting of production to contract manufacturers.

 

    3.    Alliance with Cisco looks interesting.  This will give Lucent the opportunity to replace the Springtide IP Aggregation Switch .  We also saw it mentioned that this will help replace the TMX880 Multiservice Switch, yet we can not yet verify this.  This also gives Lucent the ability to benefit the Services Group.  The agreement covers :

 

        A.     Cisco's Packet Data Serving Node (PDSN).   PDSN enables the access of internet and intranet access via mobile solutions.

 

        B.     Cisco's GGSN . GGSN enables wireless data services for GSM / UMTS and GPRS users.

 

        C.     Cisco's MGX8000 Media Gateway and ATM aggregation products, which allow mobile operators to provision voice-over-IP (VoIP) and voice-over-ATM (VoATM) service on their packet core networks.

 

              According to a report I just read, Wireless Mobility Solutions is estimated to be a $30.7 billion dollar market in 2003.  CDMA is expected to be roughly 22 % of that market. 

 

    4.    We have seen analyst estimates for  2003 revenues between  $ 8.62 b and $ 9.60 Billion  and 2004 between $ 9.10 and 9.90 billion .  Our model is substantially higher ( 2003 at $9.856b and 2004 est at $ 10.80 billion.  This  is merely a guess and we would not be surprised to see numbers closer in line with the lower  estimates.

 

    5.    It will be interesting to watch the  $ 1.775 Billion shelf registration.  Lucent could use this as an opportunity to clean up their balance sheet.  Dilution would ultimately result, yet the key to Lucent's future without a reorganization is in their balance sheet.

 

    6.    We expect the Reliance Contract to have a large impact in the March Quarter.  You can see that the asset section in the balance sheet has a section called " Contracts In Process ".

 

    7.    One brokerage firm expects Verizon Wireless to be waiting for Lucent's new CDMA base station to be released.  The firm expects that this will generate revenue for Mobility Services in the March quarter.

 

    8.    Lucent indicated in their conference call last week that cash would burn at a greater rate in the March quarter. It is expected that this is due to the ramping of China Unicom and Reliance.  This is speculation on our part and has not been disclosed by Lucent.

 

    9.    March quarter is generally seasonally lower. It will be interesting to see if Lucent will meet its $ 2.50 billion guidance and if so, how that will be perceived going forward.

 

 

 

       
 

 

 

January  8, 2003

 

More Lucent Concerns

 

I read an interesting report yesterday written by Smith Barney (SSB), on Lucent and Nortel. SSB thinks that capital spending has bottomed and could improve during 2003.  They think that Nortel will gain market share as they expect Lucent will continue to struggle financially.  They believe that each downsizing at Lucent will give opportunity to others to gain share from Lucent.  They mention that Nortel has stronger IP capability and is doing a better job than Lucent in Circuit To Packet technologies, particularly in Class 4/5 switches.  SSB remains concerned with Lucent's 2003 wireless revenues, since the completion of the Verizon and Sprint build-outs last fiscal year.  SSB remains unconvinced that Lucent will achieve breakeven during F2003.

 

 

 

December 20, 2002

Major RFP (Request For Proposal) in the works ?

 

We wrote previously about GIGBE ( Global Information Grid Bandwidth Expansion)   www.rbcpa.com/companies/corvisnotes.html  look at our writings on November 13, 2002.  We have come across more information in regards to GIGBE and the telecom space.  Project of about $ 875 M to be awarded in 2003. This will be a 2 year project.  Sources believe that US based companies will have an advantage over international companies, such as Nortel and Alcatel. Larger companies such as Lucent and Cisco will have an incumbent advantage because of their large established businesses. Yet, we are still hearing Corvis being mentioned in the Long Haul Optical.  GIGBE will focus on upgrading the Defense Information Systems Agency (DISA) communications network.  The focus will be on upgrading the existing network to Next Generation Optical Networks, Ethernet technologies and increasing the security of the network.  We have read that the RFP will be broken up into 3 components. We have read an estimate of the entire $ 875 M RFP to be sectioned evenly among Optical ( which includes Fiber, Metro and Long Haul Optical), Ethernet and systems integration.  We have read a discussion that a further RFP will be awarded for additional connectivity, security and switching equipment. We were previously reading a lot of speculation that Corvis was in the running for much of the Long Haul portion. We have seen less discussion of Corvis lately in this realm.  This does not at all mean that Corvis is not in the running. We merely have been reading a number of reports without a Corvis mention.  This actually should not be considered uncommon as they are one of the smaller players, and could theoretically surprise many of the incumbents if they were part of the RFP awards.

 

 

November 7, 2002 3:00 PM

How is Cisco affecting Lucent ?

Cisco reported earnings last night and it appears they are taking market share from some of the traditional equipment vendors in the Service Provider area. Of course Lucent fits that description.  We do not know for sure if Lucent is losing market share in Wireline to Cisco, but the thought certainly makes sense.  Cisco reported a strong backlog  with Service Providers.  Service Providers sales during the quarter at Cisco were flat.  This is quite interesting as Lucent and other equipment vendors showed weakness in this arena.  It is our concern that Cisco, which gives the appearance of being balance sheet strong, may take further market share in the Service Provider market. Keep in mind that Cisco has always been strong in the Enterprise sector and is now just starting to focus in the Telecom sector. One major brokerage firm discussed that Cisco  may be gaining market share from Lucent in  ATM switching .

 

The Wall Street Journal reported today that John Chambers, CEO of Cisco said the following in regards to Lucent. Chambers was asked if Cisco was considering buying part of Lucent's switching business. Chambers answered " While I never say never...it's as close as I can say to that".

 

As we have been writing such gloominess on Lucent over the last few weeks, we are reminded that Lucent still does have a huge installed base. Lucent has about 1/2 the revenues of Cisco. Revenues are still over $2.0 billion (we write with our fingers crossed). We still project revenues of just under $10 billion in Fiscal 2003 (which started October 1, 2002). 

 

We mentioned that we had heard from industry sources that the metro optical tests in Verizon labs were not going well. If anyone has feedback on that, please let us know. We have not confirmed the status of the tests, nor have we confirmed that Verizon is unhappy with the testing.

 

 

 

 

November 6, 2002 11:00 AM

 

Multiservice Switching At Risk ?

 

It is our understanding  that the GX 550 was complemented with incremental added features by the recently terminated TMX 880.  Our question is how will Lucent convince it's customers and prospects  to base their infrastructure that does not offer nearly the same capabilities as its competitors.  Our question is why wouldn't  a potential or even a current customer consider using  alternative solutions. Our  understanding is that the GX550 can be scaled from 4 to 10 times greater,  by basically all other competitors. GX 550 has over a  25 % market share, but was recently pushed from the number 1 spot to the number 2 spot by Nortel.  Perhaps the answer to all this is that Lucent is betting that the NGN (Next Generation Network) buildout is stalled, and until then the GX 550 offers a stable solution.

 

Competing products of the GX 550 are Nortel Passport 15000  and  20000 and  Alcatel 7670 RSP .  Lucent's primary customers for the GX 550 are China Unicom, SBC, Embratel, KPN Telecom, WorldCom, and Verizon.

 

We recognize that the GX 550 has been in deployment for over 4 years. We have concerns that Lucent's recent product and research and development cuts will hurt the future of Lucent. Yet, we recognize the financial demand and need for this measure to be done.  We are more and more beginning to believe that Lucent's primary focus in the future will be Optical Networking and Mobility Solutions.  Time will tell if the new initiative to Professional Services will be a long term contender. It is our understanding (going from memory), that Lucent considers Professional Services to be a $ 53 billion dollar market.

 

We would like to again emphasize that these are merely our notes in monitoring Lucent.  We are hardly experts in the area of the technical aspects of the technologies and products mentioned.  We would welcome feedback  regarding this note or any others.

 

 

 

November 5, 2002 10:30 AM

 

More on Verizon

 

Industry sources are saying that the Verizon announcement will not increase capital spending, merely reallocate it. It is still possible that Verizon will actually cut its 2003 capex budget.  We are under the impression that the carriers which will be affected most positively by this announcement will be Lucent, Cisco, Fujitsu and Nortel.  We have read that the deployment and action will be quick.  Verizon will focus the build on its Metro Ring between New York and Boston, along the I-95 corridor during first half of calendar 2003. The full backbone will take approximately 18 to 24 months.  Verizon will access "cheap" long haul capacity, that is currently available, on a leased basis.

 

New equipment spending for this deployment will probably consist of Metro DWDM, ATM, Frame Relay, SONET , GigE and VOIP (Voice Over Internet Protocol).  Previously, Lucent was awarded the exclusive DWDM from Verizon. Industry sources have stated that Lucents MetroEON performed poorly in Verizon's labs. This may give Verizon a reason to use Nortel in this quick build-out.  Both companies are trying hard for the business. Lucent is asking for more time to show their products, whereas Nortel is pressing Verizon to let them do this metro build-out. We sure could use more information in this area.  Nortel is currently Verizon's vendor of choice for enterprise customers.  we hear that Lucent is working closely with Verizon on this one, but if Verizon is looking for this build-out to be quick and effective, we fear that Nortel will be selected as the Metro DWDM provider.

 

On the other hand, Lucent is Verizon's current key provider of ATM/ Frame relay services. With that, it is expected that Lucent would win most of that contract, followed by Alcatel.  Lucent is also a main provider of SONET services, along with Fujitsu and Nortel. Nortel is limited in the region, so we expect much of the SONET portion to be awarded to Lucent.  We do not expect Lucent to be the provider for GigE or VOIP.

 

Please keep in mind that most of the above is hearsay and speculation .  We are not fluent enough or well enough "connected" to be relied upon the above discussion to be accurate.

 

 

 

 

 

 

 

November 4, 2002 7:00 PM

    Verizon announces some changes

Verizon announced today that they would increase their capacity to supply data operations to large corporate and government customers.  They apparantly did this to combat the decline in revenues that traditional telephone companies are seeing.  Verizon will eventually provide network management, data storage, security, remote access, voice and data networking and optical networking.  We read in an article , that Verizon was expecting to spend $1.0 billion on the infrastructure of this between now and 2005. 

 

We see this as confirmation that voice is slowing and data networking is emerging.   Carrier spending will migrate towards the data networking equipment sector.    This should be a benefit to Lucent's ATM and frame relay products. 

 

This is not necessarily great news for Lucent, as Verizon is expected to purchase existing capacity from other service providers.  This also might slowdown the anticipated revenues on voice products.

 

November 4, 2002 11:30 AM

Update

    1.    We mentioned in our November 1st comments that Lucent expects wireless to grow sequentially , Quarter to quarter. We would like to mention that growth is expected to be spread both internationally and within the USA.

    2.       Something to look for in F2003 would be the traction of Lucent's DMX products .

    3.        It is our understanding that Long Haul product LambdaExtreme is being tested by AT&T.  We have been studying this potential deployment for quite a while. It has been mentioned that CIENA and Corvis are also in contention. George Gilder www.gildertech.com  (subscription needed) feels that Corvis is a major contender for that contract. Gilder feels that a Corvis long haul solution will cost $110 million dollars less than say a Lucent or CIENA solution and in turn save the Service Provider "some $ 515 million dollars in operating expenses over time."  . The Corvis product is the Corvis Optical Network (ON) .  Obviously, this is something all Lucent investors should keep there eye on.  As a side mention, Gilder also has hinted that Corvis may have  another deal pending with a deployment in China. Given that Corvis only has a few customers; it would seem that any deployment announcements by Corvis would be material to Corvis.

 

 

 

November 1, 2002 11:00 AM

            Waiting On A Sunny Day

 

 

We have been concerned with the recent SEC discussion. Although, Lucent states nothing new and that this is all "old news", we remained concerned. Not much we can do , other than research and wait.  We discussed some potentially aggressive issues in our note right below this one.  We sit and wait on this, and hope it is a non issue.  We realize the fragile nature of Lucent's situation. There does not appear to be much room for missed guidance.

 

Anyway, here is what we have been hearing lately :

 

    1.    Lucent continues to expect year over year revenue declines of 20 %.  This would bring F2003 revenue at around $9.80 billion.  At this point we have no reason to comment on this guidance. We are concerned that Lucent has mentioned that Q1'03 would be the most difficult quarter on cash burn, and that leaves open the inherent possibility of downward guidance in Q2'03, which could occur in late February, mid March 2003, if it were to occur. 

 

    2.    We have unofficially heard that Lucent expects mobility solutions to grow sequentially over the next two quarters , whereas wire-line business to recover in Q2'03.  To us, this makes sense , since the mobility contracts have been announced with Reliance, China Unicom and such. It does provide more color of the guidance given on October 23, 2002.  It is our understanding that Lucent basis for this guidance is based on conversations with customers, contracts awarded and anticipated deployment of network equipment.

 

    3.    We expect that Lucent will still have a shareholder voting for a reverse stock split at the annual meeting in February.  This will give Lucent to act quickly if a delisting scenario becomes a reality. If you have questions, just let us know  .

 

    4.    Lucent still does not expect a cash contribution to the recently under-funded pension plan during Fiscal 2003.  Lucent does not know the extent of funding requirements for Fiscal 2004.  If the investments of the pension portfolio stabilize then it has been brought to our attention that Lucent envisions a pension contribution for Fiscal 2004  in the $100 to $200 million dollar range.

 

    5.    Lucent bonds have crept up the last few weeks.  Most bonds are trading at 50 cents on the dollar, which surprising enough is a major increase from the high 20's to the low 30's level right before earnings were released.  We have no "feel" for what the bonds are saying. They are still trading at incredibly distressed levels, and they may have been artificially boosted with Lucent's recent announcement of buying back several bonds.

 

    6.    Lucent expects to burn $1 billion in operational cash in Fiscal 2003.  At this point we fully expect that Leap Wireless (still un-announced as the defaulted vendor) has already been factored into the F2002 numbers and is a non cash event in the future (assuming worst case scenario).

 

   

 

 

 

October 30, 2002 3:00 PM

Just Some Stuff

" Faith Will Be Rewarded " ?

Some research we have been working on.  Salomon Smith Barney (SSB) yesterday adjusted their 12 to 18 month price target of Lucent to 0.65, Lucent is up 14 % today to  $ 1.15.  We don't like to read brokerage reports for the guesstimates of price targets. Rather, we like to read the reports to gather information and to use that information to "stress test" (hmmmm. a familiar phrase with Lucent lately) our own research.  SSB is concerned that Lucent might be losing market share to Nortel and that Lucent is spending too much focus on their financial overhang. Most certainly these are concerns. Yet, don't lose sight that Nortel is not in the best of financial shape either. Actually, it sure seems that the majority of telecom equipment suppliers are all in poor financial shape.  SSB also sees a weakening of both revenues and margins due to the completion of the Verizon and Sprint wireless build-out.  Wireless upgrades are high margin  businesses and there is a concern that margins will drop with these subsiding.  SSB is also concerned that there will be market share losses in specific industries , yet I didn't notice any specifics. We have seen both Lucent and Nortel generate some large contracts in the Wireless and Wireline area over the last few weeks.  We have heard the argument that SSB has not given credit to Lucent's recent contract wins with Reliance, China United Telecom, KTF of Korea, MetroPCS & Tata Teleservices.  Yet, if you look