January 22, 2003
Conference Call Notes and Observations
Lucent Technologies, Inc.
3 Months ended December 31, 2002
please see Disclaimer at bottom of report
This report was last amended on January 22, 2003.
Lucent Technologies, Inc. designs and delivers networks for the world’s largest communications service
providers. Backed by Bell Labs research and development, Lucent, claims to rely on their
strengths in mobility, optical, data and voice networking technologies, as well
as software and services, to develop next-generation networks. Lucent, claims that their systems,
services and software are designed to help customers quickly deploy and better
manage their networks and create new, revenue-generating services that help
businesses and consumers.
Notes From Conference Call
Pat Russo – Chief Executive Officer:
Claims to have made good progress on road to profitability. Cash usage was better than anticipated during quarter. Down to about 40,000 employees. Has retired more than a billion dollars of convertible debt. Reaffirming revenue guidance. Targets increased gross margins and $2,500 revenues in Q2’03.
Frank D’Amelio – Chief Financial Officer
1. GAAP results were used. Lucent has eliminated Pro-Forma reporting.
2. Service Revenues were 468 million.
3. Gross Margin was 22 %. Gross margin improved from prior quarters. By end of F2003 , Lucent expects gross margins in the mid 30’s.
4. Lucent expects bottom line improvement next quarter.
5. Lucent feels it is on the road to proper cost containment .
6. R&D was $389 million.
7. Cash used was $ 742 million. Capital spending was 155 million. This includes repurchase of real estate. Restructuring dollars used were $ 212 million.
8. Cash declined by $ 700 million from prior quarter. Including 200 million for restructuring. Expects cash usage of 1.6 billion for remainder of year. Interest is expected about 300 mil, (which calculates to 100 mil per quarter… these are my interpretations).
9. Shelf filing for debt later today for $ 1.77 billion. This will replace existing debt shelf.
10. Annual interest and dividends will be reduced annually by $ 90 million. This was caused by the buy back of convertible debt.
11. Plans for F2003 revenues to be down 20 % from F2002. Plans return of profitability by end of F2003.
Pat Russo – Chief Executive Officer:
1. The market remains challenging and difficult.
2. Customers are understanding advantages of using Lucent.
3. Strengths in products and new contracts.
4. Emphasizes service contracts.
5. Partnership Strategy becoming more important. This increases opportunities for software and services. The Cisco contract is an example of the Partnership Strategy. Cisco relationship will benefit software and services.
6. Overhaul of entire supply chain has been a priority over the last 18 months. This has been successful in operating margin improvements.
Question and Answers
1. Pat explained that Lucent is committed to working in data market. Looking for MPLS capability. Will look to partner. One place is the IP core.
2. Service business projection for 12 months will be tied to overall volumes and product volumes. Service business should step up with other business. Lucent did not discuss whether Services will increase or decrease for F2003. Frank later mentioned that Service Revenues declined 16 % QoQ.
3. Lucent offers no update as to what long term gross margins will be.
4. Lucent sees greatest increase in Q2’03 revenues in mobility.
5. Question was asked about 10 % customers. There was one, 10 % customer. Who is that customer ?
6. Lucent will not give further input on Pension contributions. No payments expected in F2003 and will possibly have a payment in F2004, yet Frank mentioned is it is unlikely that F2004 contribution would be required. Current estimates are up to $ 350 million for post retirement health care payments.
7. Question on current quarter Book to Bill . Backlog is 1.9 billion. According to Frank, Book to Bill should not be used as an indicator. We still would like to know what Book to Bill number is. Perhaps it was mentioned in conference call, but we did not pick up on it.
Some “ back of the envelope” financial observations
1. It is interesting to see that Lucent is seeking breakeven results with $2.50 billion in revenue. Here are some comments that Lucent made one year ago ( January 22, 2002 ).
A. Breakeven levels will drop before end of fiscal year. Lucent believes that this quarter was the worst we will see in revenue. Believes revenue next quarter will increase 10 – 15 %, with even a greater improvement in bottom line. Lucent believes that breakeven can be attainable at $ 4.25 billion, this is a reduction from prior $ 4.75 billion.
B. For Fiscal year Lucent claims that margins in the 20’s are available to them in Q2’02. Given the uncertainty in the market conditions, they can’t give certainty to these levels. Henry said that they need > 22 % gross margins to achieve positive cash flow. Henry feels that is quite attainable. Reminded us that F2003 gross margin targets are 35 % sometime in 2003. Lucent said they ended December quarter with 62,000 people. Lucent sees this headcount declining by end of June to less than 55,000. These expense reductions will be evident in cash flow shortly.
C. Henry Schacht finished the call by saying that the achievements by Lucent that were discussed one year ago are being met. Organizational changes have been put into place, funding and liquidity has been attacked, CEO has been hired. Henry sounded pleased and Lucent sounds driven to achieve results. Henry is looking forward to a discussion again in 3 months. He looks to accelerate from here. Pat Russo will chair next meeting and Henry said “ I know it will be a marvelous quarter .”
2. Days Sales Outstanding (DSO) is 63 days. One year ago, DSO was 98 days.
Receivables appear to be managed properly, yet revenues are so low, that this ratio is not as valid. If Lucent ever reaches revenue stability, this ratio should prove to be a more useful indicator.
3. Current Ratio (Current Assets / Current Liabilities) is 1.48. One year ago this number was 1.86
4. Accounts Receivable decreased $ 181 million from Q4’02, sales decreased $ 202 M from Q4’02. If you project revenues to $9.6b B for F2002 (not our projection, just a “what-if “ argument) then A/R as a % of revenue would be 15 %. Accounts Receivable, as a % of Revenues was13.37 % in F2002, 21.57 % in F2001, 28 % in F2000, 29 % in F1999 and 23 % in F1998. Receivables appear to be managed properly, yet revenues are so low, that this ratio is not as valid. If Lucent ever reaches revenue stability, this ratio should prove to be a more useful indicator.
5. Inventory decreased $ 270 M. Again, if we extrapolate F2002 revenues to an arbitrary $9.6 billion, the Inventory/ Sales ratio would be 11 %. Inventory / Sales Ratio at F2002 was 11.06 %, F2001 was 17.12 % and 17.65 % in F2000.
6. Acid Test Ratio (CA- Inventory)/CL is 1.29. In F2002 the ratio was 1.23, F2001 where it was at 1.22 and from F2000 of 1.01 and F1999 of 1.14.
7. Research and Development was $ 389 million, or 18.75 % of revenues. The last known guidance I can recall regarding R&D is that Lucent claims it will level out at 12 %. This was discussed by Lucent in 2001. I do not recall if it was discussed subsequently.
8. Need to look at tax benefit on income statement and tie in with SFAS 109. We want to make sure there is no aggressive accounting here. We are not to concerned since the survival of Lucent sure goes much further than a $ 120 million dollar P&L item.
9. Cash usage relative to quarters going forward. Expected improvement in second half of F2003. Uplift of revenues will cause pressure on cash flow in Q2’03. This is a concern of ours. Something to watch. If Lucent ultimately guides down in second half of 2003, this could cause great difficulty and potentially not enough time to adjust ones investment.
10. We would like to know a detailed explanation of Pension benefits and expected payments for each of the next 5 fiscal years.
11. Flow Ratio is 1.09. The Flow Fatio is desired to be less than 1.25. Here is the formula : Current Assets = $ 8,243, Cash = $ 2,408, Current Liabilities = $ 5,547 and Short Term Debt = $ 193.
Flow Ratio = (CA – Cash) / (CL – STD) = 1.09. The ratio was 1.01 on December 31, 2002, 1.48 on December 31, 2001 , 2.85 at FYE2000 and 2.36 at FYE 1999.
12. Book Value is a negative number.
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 has undergone revisions starting on January 22, 2003. We will not notify readers of future revisions. We are not responsible to keep readers of this report updated for changes or material errors or for any reason whatsoever. This report is dated January 22, 2003; it is possible that by January 23, 2003 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. 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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