Lucent Seeking to Regain Its Luster

Lucent Technologies Inc.’s total stock market value has plunged 57%, or $141 billion, this year. How much is that? Enough for Lucent to have bought all of the Big Three domestic auto makers--General Motors Corp., Ford Motor Co. and DaimlerChrysler--and still have billions left over to throw a heck of a party.

But Lucent’s woes are no laughing matter. The world’s largest maker of telecommunications equipment, once a blue-chip stalwart of Wall Street, has shocked investors with lousy earnings for the last three quarters, driving its stock lower again and again.

And this is no ordinary stock: It’s one of the most widely held stocks in the world, with 3.3 billion shares outstanding and investors that include scores of mutual funds and other institutional investors that own millions of Lucent shares apiece. Lucent’s huge stockholder base stems partly from its former ownership by AT&T; Corp., the old Ma Bell. Lucent was spun off in 1995 and, in fact, is the successor to the innovative Bell Labs that traces its roots to Alexander Graham Bell.

Yet the shortfalls in Lucent’s performance not only have sent those billions in stock value up in smoke, but they have also done the same for the credibility of Lucent and its chief executive, Richard McGinn. McGinn had promised that Lucent’s growth was going to pick up this year, then had to repeatedly admit that the company was failing to meet Wall Street’s forecasts.

And though Lucent executives declined to comment for this article, citing the company’s fiscal year-end on Saturday, they’ve conceded that the company itself has made costly mistakes. They also maintain that they’re setting the stage for a rebound at Lucent, though many analysts remain skeptical.

It’s a stunning setback for Lucent, which was a star performer and a can’t-miss stock for four years after its spinoff. Telephone companies and other customers kept craving Lucent’s conventional switches and other complex transmission gear in good part because the Internet fueled an explosive need for more telephone lines and capacity.

After going public in 1996, the stock soared nearly tenfold and split twice in four years. Lucent’s peak came in its fiscal year ended Sept. 30, 1999, when profit--excluding one-time items--surged 46% from the previous year to $3.8 billion on sales of $38.3 billion.

But now the Murray Hill, N.J.-based concern is seeing its mature, core business slowing, while lagging its competitors with new, optical-networking gear products that telecommunications firms, Internet service providers and others are demanding to move their signals at much faster speeds.

Plus, as more of those customers pack voice, data, video and other signals into their transmission lines, Lucent is running into even more ferocious competition, with the likes of networking powerhouse Cisco Systems Inc. taking on Lucent in the market for computer routers and switches that primarily move data.

Lucent’s stock, which opened the year at $75 a share, closed Friday at $31.88, down 13 cents for the day, in New York Stock Exchange composite trading.

To be sure, several other telecom companies--both those that build the industry’s infrastructure, such as Lucent, and those that provide service to consumers and business--have seen their stocks plummet this year on the heels of missteps, fierce competition and attendant earnings and sales problems.

AT&T;’s stock is down 42% this year, for instance. WorldCom Inc.’s shares also have lost half their value, wiping out $78 billion of its investors’ wealth, and Sprint Corp.’s stock has plunged 63% this year.

But analysts said there’s no direct connection between the setbacks for those service providers and for Lucent, in terms of a sudden decline in orders for switching gear and other equipment.

“There is nothing wrong in the market” in terms of demand, said Steve Levy, a Lehman Bros. analyst who’s been a frequent critic of Lucent and has a “hold” rating on its stock. “This was mis-execution by Lucent.”

Indeed, while Lucent’s stock has been tumbling, the American Stock Exchange’s index of 15 telecom network stocks--which includes Lucent--has surged 37% so far this year. That’s because several of Lucent’s big rivals are thriving, such as Canada’s Nortel Networks Corp., whose stock has jumped 33% so far in 2000, and Ciena Corp., whose stock has quadrupled in price.

Lucent’s troubles are having other ripple effects besides punishing its stock. “The most alarming thing I see is the number of people leaving Lucent,” said Tim Savageaux, an analyst with WR Hambrecht & Co. in San Francisco. “Lucent people are well-trained, experienced and competent people, and they’re in high demand.”

In guiding down Wall Street’s expectations, Lucent now says it expects sales and profit to grow about 15% for the quarter ending Saturday, but in the next quarter, ending Dec. 31, it’s predicting a 15% drop in earnings compared with a year earlier.

Lucent, which also reported a $301-million loss for its fiscal third quarter ended June 30, is still confident of delivering about 20% sales and profit growth for all of fiscal 2001.

Lucent could see that demand for its conventional, large-scale switching gear for telephone companies and long-distance providers was going to fall, but it hasn’t yet been able to offset that slowdown with sales of its new optical-networking products.

These optical products can move many more voice, data and video-streaming signals across a single line and at much greater speeds, which is critical for customers ever more dependent on Internet services. They’re increasingly the products of choice for long-distance carriers and other service providers that are shifting more of their efforts from voice signals to data.

Lucent also was slow getting its new optical gear to the market, and it made a major tactical error. In designing its first major optical-networking product, Lucent opted to expand the capacity of its fiber-optic cables so that customers could send more voice, data and other transmissions along the single line.

But Nortel opted instead to have its new optical product send a more limited amount of capacity but at vastly faster speeds, and the product was a smash. Many of Lucent’s traditional customers were among those shifting their spending to the faster technology.

“Nortel had its way with [Lucent],” said Lehman’s Levy. Lucent eventually got a similar product out too, but by that time, “Nortel had a significant cost advantage and it dropped its prices,” putting Lucent at an even greater disadvantage.

With Lucent’s earnings and stock price slumping this year and its reputation on Wall Street tarnished, the company has announced several strategic moves to streamline the company, unleash more value for its stockholders and put its focus on its core networking products business.

Among them: Lucent is spinning off a unit called Avaya Inc. that sells phone and data networks to corporate customers only. Lucent also plans to spin off its microelectronics group into a publicly held entity that could have its own market value of anywhere between $40 billion and $80 billion, analysts say. Lucent hopes that move, in particular, will lift its own stock because existing Lucent investors will get a stake in the new company.

Analysts also give Lucent high marks for hiring respected Chief Financial Officer Deborah Hopkins from Boeing Co. last spring. Hopkins has acknowledged Lucent’s missteps and is trying to mend Lucent’s credibility on Wall Street by giving analysts more realistic expectations about Lucent’s prospects.

Lucent also is looking for a new chief operating officer, a search Wall Street is watching closely because the new hire probably would be in line to compete for McGinn’s job.

But even with new management, new products, a new corporate structure and a new game plan, Lucent’s comeback will take time. “Do they have the ingredients to turn this around? Yes,” Levy said of Lucent. “But this is not something that gets turned around overnight. There are no silver bullets here, no magic pills to take.”