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In Focus: Lucent earnings
November 21, 2000: 2:14 p.m. ET

Analyst Max Schuetz talks about the latest on Lucent's earnings restatement
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NEW YORK (CNNfn) - Max Schuetz, optical communications analyst at Thomas Weisel Partners, comments on Lucent's earnings restatement and the company's outlook.

In Focus airs daily on CNNfn's network at 12:10 p.m. The following includes comments Schuetz made both during the show and in the pre-show interview.

Click here for up-to-date news on Lucent.

CNNfn: What is a revenue recognition issue?

Schuetz: It's something Lucent (LU: Research, Estimates) accounted for as a sale that under accounting guidelines wouldn't be recognized as a sale. With large contracts, a product is shipped to a customer site but if it isn't installed in the network, depending on the contract sometimes the customer doesn't have to pay until the equipment is in service, so the equipment may be at a customer site but it will still be in Lucent's books rather than the customer's books. The order may have been shipped but it's not technically a sale yet. The accountants found $125 million which Lucent had taken off their books and reported revenues, but technically that should still be on their books.

CNNfn: The company is reducing estimates by 2 cents for the quarter and the full year -- how bad is that?

Schuetz: They reported 18 cents last quarter, so it's over 10 percent. It's a fairly significant number. Lucent is struggling to regain credibility after missing estimates for two quarters in a row. The impact on people's ability to believe Lucent's forecasts and reports will be more significant than the financial impact.

CNNfn: Now Lucent won't be able to confirm its guidance for the first quarter -- does that concern you?

Schuetz: That's a natural result of what's going on. If they're re-evaluating what is or isn't a sale, sales would get moved to the December quarter and that would likely change the guidance. It will be a concern given the company's credibility issues, but investors won't be overly panicked about it.

CNNfn: Last month Lucent fired Chief Executive Rich McGinn, who lost his job after the giant equipment maker was forced to cut earnings estimates four times in nine months -- is today's warning still a spillover from that?

Schuetz: Yes. With a company of Lucent's size and scale, it takes a long time to turn it around. This is an oil tanker, and once you start reorganizing it takes a long time to get the oil tanker turned around. Having seen Motorola and Ericsson's reorganizations, it will probably take a year or longer for everything to play out for Lucent.

CNNfn: Lucent is one of the most widely held U.S. stocks -- and it's been falling steadily this year -- what's your outlook for the stock?

Schuetz: Lucent stock has a pretty good support level at around $17. Investors will be looking out for the anticipated spinoff of their micro electronic business, which is their chips and optical components business -- that's a $4 billion business and the most lucrative business Lucent is in. Right now our valuation estimates places it at two-thirds of Lucent's overall market cap. I don't expect to see a lot of decline in the stock prior to the spinout. Much below these levels you'll see a lot more people buy in looking for a "back door" to the spin out. Lucent's component business is extremely strong. They're market leaders in that area.

CNNfn: What's your outlook for the optical communications sector?

Schuetz: Positive. A lot of people have been worried about what's going to happen to carrier spending next year, but if you look ahead, even if spending is flat to slightly down next year, growth will still be in the high double digits. Optical was about 20 percent of carrier spending this year. We expect it to be 30 percent or so next year.

CNNfn: What are your favorite stocks in the group?

Sycamore Networks (SCMR: Research, Estimates), JDS Uniphase (JDSU: Research, Estimates), Corning (GLW: Research, Estimates)

--Compiled by Lucy Banduci. CNNfn reporter Carmina Perez contributed to this report  graphic


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