These were preliminary Lucent Notes. These notes were not updated.
Notes To Conference Call
April 24, 2001
Price : $9.75
5 Year Price Target : $43.00
Opinion : Long Term Strong Buy for the Risk Tolerant Investor (Please read disclaimer at end of report).
Shares Outstanding: 3400.8
Market Capitalization: 33,158 million
Estimated 5 year growth rate : 20 %
Symbol / Exchange : LU/NYSE
things to get clarification on today
1. Reduced capital spending ahead of plan by 100 million, yet LU achieved revenues of 5.9 B.
2. I would really like them to break up the optical networking segment. It would give us the ability to better gauge Lucent as we could compare them with CIENA, Nortel, CSCO, etc.
3. Proforma Gross Margin is only 17.50 % (improved, yet horrible) and GAAP Gross Margin is 8.44 %.
4. DSO (days sales outstanding) of Accounts Receivable to a very acceptable 62 days.
5. Debt to Capital ratio is a healthy 19.60 %
6. Current Ratio is fair at 1.6 X.
7. Customer financing outstanding at 3/31/01 is 2.768 B. This needs to be watched.
8. Cash decreased 2,412 million
Accounts Receivable decreased 476 million
Inventory decreased 272 million
Revenues increased 1,561 billion
Research and Development decreased 42 million
Interest Expense increased 26 million
Accounts Payable decreased 247 million
Current Liabilities increased 91 million
Long Term Debt increased only 6 million
Short Term debt decreased 2,701 million
Total Debt decreased by 2,695 million
Shares outstanding increased by 13.6 million shares (this is not a very dilative increase which could be quite positive in the future.
10. Acid Test Ratio (CA – Inventory)/ CL = 1.054 (this compares okay with F2000 and F1999 respectively 1.01 and 1.14.)
11. Research and Development is 16.40 % of Revenues. (If spent properly, R&D is the seed of future revenues.)
A. Equity Ratio at Market = Common equity at market value / Tangible assets – accrued payables
Using share price of $ 9.75.
shares outstanding of 3400.8
market capitalization = $ 33,157,800,000
Tangible assets = $ 39,004,000
Accrued payables = $9,730,000
Equity Ratio at Market = 1.13
Using the same market capitalization, the Equity at Market ratio in F2000 was 1.61 and F1999 was 1.72.
13. Remember that in last earnings call Lucent guided that results of restructuring and renewed focus would not occur until second half of fiscal year.
14. Book Value is 6.486 per share. This is a reduction from 7.87 per share from Q101. Price to book using share price of 9.75 is 1.50 (at Q101 price to book was 1.72). Incidentally, CIENA (using 65) trades at around 24X book.
15. F. The Motley Fool Flow ratio is 1.79. This is an improvement from F2000 of 2.71 and F1999 of 2.99, yet The Motley Fool prefers to have the Flow ratio to be less than 1.25. This link explains the Flow Ratio
Flow Ratio = (CA – Cash and CE)/ (CL – STD)
CA = 18,819
CE = 1,402
CL = 12,044
STD = 2,314
Flow Ratio = (18,819 – 1,402)/(12,044 – 2,314)
Flow Ratio = 17,417 / 9,730
Flow Ratio = 1.79
Some Web cast Notes
1. “11:01 ET Lucent Tech (LU) 9.67 +0.47: — Update — Conference call just ended. Hearing from sources at Goldman Sachs that firm was positive on LU call. Goldman was encouraged that Lucent indicated that revenues would be up in Jun qtr with EPS up even more, and that gross margins will continue to improve. LU also reducing exposure to CLEC business and is fully reserved for WCII. ”
“10:46 ET Lucent Tech (LU) 9.41 +0.21: — Update — A relatively constructive conference call thus far, with company emphasizing ongoing restructuring and improved revenue momentum. Says that sales to CLECs were under $200 mln in Mar qtr vs roughly $700 mln in prior qtr as company increasingly focusses on stronger customers”
2. Lucent expects future gross margin improvements because of the financial quality of their primary customers. Primary customers are large service providers. (Lucent did not say this but some large customers are Verizon, Deutsche Telecom, Global Crossing (Europe) , Qwest, SBC, AT&T , Worldcom and Sprint).
3. Lucent would not comment on greater than 10 % customers.
4. Lucent said all facets of its optical systems business are showing increases. They indicated that momentum of demand for their products is improving. They specifically cited “OC-192” as being strong. The progress is being seen in both equipment and service networking. Please understand that Lucent is looking to sell their optical fiber business. They are not looking to sell their optical systems business. I am hoping and counting on that the successful future of Lucent is the optical and wireless delivery of Broadband data.
5. Lucent indicated continued progress in the China market.
6. Final Comments by Mr. Schacht ( http://22.214.171.124/news/leaders/bios/schacht.html )
A. Lucent has more than adequate liquidity. They are seeing results of a more disciplined financial approach. The Accounts Receivable and vendor financing is more disciplined.
B. Better revenue predictability for the future.
C. Seven points of restructuring and goals as described in January 2001 are being met. All goals are showing progress.
The following are CC highlights from a friend of mine. (Included with permission, yet the preference of remaining anonymous.
Highlights from a friend:
1. Henry reiterated the “We will talk Less and Do More” philosophy.
2. After a 36% sequential improvement (Q1 -> Q2) in TOP line revenues, Henry went on record as supporting a “MODEST” Q3 sequential improvement.
3. The $.02/share sequential IMPROVEMENT in pro-forma came AFTER aa $.15/share RESERVE for Winstar losses. (So real operating pro-forma is around a $.22/share loss)
4. Sales focus is now almost completely on “LARGE STABILIZED CARRIERS” (see my earlier posts on this topic). Presumably this includes major PTT’s (BT, Deutsche Telkom), LECs (Qwest, Verizon, SBC), IXC’s (ATT, Worldcom, Sprint), and wireless carriers. Sales to CLECs declined (GOOD!).
5. Operational improvements to field operations. Sales funnel process and visibility is much improved. Funnel reviewed bi-weekly and as recently as YESTERDAY. Web based booking and shipping system now covers 80% of sales.
5. Past Due receivables declined by $700M (GREAT!). This was due entirely to aggressive collections, reducing days outstanding by 62 days. It was NOT due to write-offs.
6. HENRY: “We have adequate liquidity to fund operations going forward”.
7. Net debt improved by $300M ($2.5B-$2.2B) BUT this is calculated by allocating $2.5B to AGR.A on the plus side (GOOD), $900M in net negative operating cash flow (BAD), $600M aftereffect from sold receivables (BAD), $500M in credit line drawdown (?), and $200M in operating monies to AGR.A (?).
PTT = Postal, Telegraph and Telephone – Acronym for former gov’t owned monopolies in Europe such as Deutsche Bundespost, British Telecom, etc. Currently in financial trouble due to de-regulation and rapacious gov’t auctions of Radio Frequency (RF) bandwidth for next generation cell phone services (see 3G Wireless).
LEC = Local Exchange Carrier – One of former 7 (now 3) Baby Bells
CLEC = Competitive Local Exchange Carrier – One of MANY alternatives to Baby Bells who are now getting their lunch eaten due to continued monopolistic practices of the Baby Bells and inability of gov’t regulators to do anything about it.
IXC = Inter Exchange Carriers – Long Distance guys like Sprint, Worldcom (formerly MCI), and AT&T.
3G Wireless = Fancy name for next generation cell-phone network
ISP = Internet Service Provider – group of mom&pop’s that got gobbled by ALL of the above.
DSL = Digital Subscriber Link – Over-engineered and under delivered technology for hooking up high speed digital services such as Broadband Internet through existing LEC wires to residences and small businesses.
Cable = CATV = Cable TV carriers = AOL/Time Warner and 7 dwarfs. Also means cable going to YOUR house by which you may get high speed Internet service a lot sooner and with better service than through LEC and DSL.
Entertainment Media = Confused creators of stuff we want to listen to and watch on ANY of the above networks. They can’t figure out how to deal with Internet technology, so they are using their lawyers to screw innovators and consumer alike rather than figuring out how to innovate, create and make money off of the ‘net.
Lucent Technologies Inc. is a designer, developer and manufacturer of communications systems, software and products. Lucent is engaged in the sale of public and private communications systems, supplying systems and software to most of the world’s largest communications network operators and service providers. Lucent is also engaged in the sale of microelectronic components for communications applications to manufacturers of communications systems and computers. Lucent’s research and development activities are conducted through Bell Laboratories, a leading industrial research and development organization.
If you are a client of ours, and if you have questions regarding Lucent, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading this report, we urge you to do your own research. We will not be responsible for any person making an investment decision based on this report. This report is a “by-product” of our research. We are not responsible for the accuracy of this report. We are not responsible for errors that may occur in this report. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate Lucent from our portfolios. This report is dated April 24, 2001; it is possible that by April 25, 2001 we could have eliminated our entire Lucent position without giving notice to any reader of this report. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have Lucent Technologies in their portfolios. There could be various reasons for this. Examples of which could be, cash flow concerns, no funding available or identified as available and / or specific risk tolerance levels. Again, if you would like to discuss Lucent Technologies, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).
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