NEW YORK (CNNfn) - For the second time this year, Lucent Technologies Inc. disappointed investors by warning about its future earnings.|
The stock of the Murray Hill, New Jersey-based maker of telecommunications equipment dropped 12-1/8 to 52-3/8, or 19 percent, Thursday afternoon, after it warned that it would probably miss Wall Street's earnings forecast for the next two quarters.
Lucent's stock, one of the most widely held in the nation, plunged about 28 percent in one day last January after it warned that it would miss revenue targets for the second fiscal quarter, chopping $23 billion off the company's market capitalization.
The latest earnings warning comes as Lucent is struggling to transition its product mix from "old world" circuit-switched communications equipment to the packet-switched technology used for Internet traffic. After a misstep earlier this year, Lucent is trying to solidify its position in optical networking, a market that is projected to grow more than 45 percent this year to $24 billion and where competitor Nortel (NT: Research, Estimates) has a leadership position.
Lucent reported Thursday morning fiscal third-quarter earnings that edged past analysts' estimates and announced plans to spin off its $4 billion microelectronics business. Given the multiples now being assigned to publicly traded microelectronics businesses, that unit could have a market cap above $30 billion.
Lucent announced that it earned $1.0 billion, or 30 cents a diluted share, in its fiscal third quarter ended June 30. Analysts had forecast profits of 29 cents, according to First Call, which tracks Wall Street estimates. Lucent earned $732 million, or 23 cents a share, a year earlier.
Sales rose 20 percent to $8.7 billion from $7.2 billion.
But Lucent (LU: Research, Estimates) also warned that earnings per share for its fiscal fourth quarter will fall below analysts' expectations because of weaker sales of circuit switches, a slower introduction of optical networking products, and other factors. It also lowered estimates for the following quarter and for fiscal 2001.
"No one is more disappointed about this than I am," Chairman and CEO Richard McGinn said in a conference call with analysts. "I take this personally and hold myself accountable."
Lucent's outlook for the future
Company officials said revenue and earnings per share will grow about 15 percent in the current quarter, which would translate into a profit of about 36 cents a share, compared with the 42 cents analysts had expected, according to First Call. Lucent earned 31 cents a share in its fourth quarter a year ago.
The company also said earnings per share will fall about 15 percent in the first quarter of fiscal 2001, translating to profits of about 29 cents a share, well below current forecasts of 41 cents a share. However, despite those problems, the company said it believes that revenue and earnings will grow at a 20 percent rate for all of fiscal 2001.
Martin Pyykkonen, an analyst at CIBC World Markets, reduced his estimate for Lucent's fiscal 2001 earnings per share to $1.30 from $1.40 after Thursday's news.
"There is an increased intensity in the trend towards packet-switched equipment," Pyykkonen told CNNfn.com "Lucent gets about 50 percent of its revenue from older world technology products, and the growth rates on those products are heading to the lower single digits."
"Lucent doesn't have the position in data networking that Cisco and Juniper Networks have," Pyykkonen said. "They are strongest in optical networking; in wireless they are competitive but in the middle of the pack; and data networking is their Achilles heel."
Optical, data networking can't cover shortfall
McGinn said the primary reason for the short-term shortfall is that the company's efforts to diversify its portfolio away from circuit switching and into more high-growth businesses, such as data and optical networking products, has not quite achieved fruition. Although circuit switching product growth is expected to be modestly positive during the next two quarters, the other business lines won't be able to overcome the slowdown in growth.
"Next year, our wireless, our optical and our data networking businesses will each be larger than our circuit switching business," he said. "In the next two quarters, though, the year-to-year decline in circuit switching business will not be offset by top-line growth in other categories."
Lucent said last May that it would bolster its position in optical networking by paying $4.5 billion for the portion of Chromatis Networks that it didn't already own. Last February, it announced that it had agreed to acquire optical networking company Ortel Corp. for $2.95 billion.
At the same time, Lucent is shedding some of its slower-growth operations. It announced last March that it would create a new company comprised of its switchboard, or PBX, operations; Systimax, its corporate cabling division; and its local-area network, or LAN, business. Those business lines account for $8 billion of revenue.
However, Lucent still lacks a competitive product in the high-end router business, which is dominated by Cisco Systems and Juniper Networks. Routers are "intelligent" switches that direct data traffic over the Internet. Lucent purchased Nexabit Networks for $900 million to help gain entry into the high-end router market, but Nexabit's product came to market months after analysts had expected.