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Lucent, Yahoo! plunge
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October 11, 2000: 5:40 p.m. ET
Leading tech firms plus Motorola become latest tech-stock victims
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NEW YORK (CNNfn) - Three of the leading names in technology were added to the casualty list Wednesday after they reported quarterly results that failed to please investors or issued an earnings warning.
Web portal Yahoo! (YHOO: Research, Estimates) and communications equipment and chip maker Motorola Inc. (MOT: Research, Estimates) both reported quarterly earnings that met or beat analyst expectations after the close Tuesday. But investors were unhappy with the tone of Yahoo!'s conference call with analysts, and Motorola issued an earnings warning Wednesday morning.
Meanwhile, telecommunications and networking equipment maker Lucent (LU: Research, Estimates) issued an earnings warning for the third time this year after Tuesday's close, and warned that it will cut its 2001 forecast as well.
Lucent stock finished down $10 to $21.38, a 32 percent loss; Motorola lost $4.69 to $21.56, an 18 percent drop; and Yahoo! lost $17.31 to $65.38, a 21 percent decline.
The declines in those three tech leaders helped lead the Nasdaq composite index to within four points of its lowest close of the year Wednesday, falling for a fifth straight session. According to preliminary figures, the Nasdaq shed 72.75 points to 3,168.38 -- after falling as low as 3,103.53 earlier Wednesday.
Lucent warns for third time this year
 After the stock market closed Tuesday, Lucent said that it expects pro forma earnings per share from continuing operations for the quarter ended September 30, to be in the range of 17 cents-to-18 cents per share, compared to 24 cents for the year-ago quarter. It was the third time this year that Lucent has warned about a shortfall in its financial results.
The company's revenue guidance remained about the same as it indicated last July. Lucent said that its revenue from continuing operations would be in the range of $9.3 billion to $9.4 billion for the quarter, a 14 percent-to-15 percent increase over the prior-year period.
In July, Lucent had said that its earnings per share from continuing operations would increase by about 15 percent, instead of declining by about 29 percent, as the most recent guidance would indicate. Lucent added that its gross margins would be 39-to-40 percent, below analysts' expectations of 40-to-44 percent.
Murray Hill, N.J.-based Lucent cited several reasons for the fiscal fourth-quarter shortfall. Among those reasons: It established higher reserves to cover potential bad debts from financing given to newly established telephone companies; it saw a 13 percent drop in sales of traditional telephone switching equipment; and it experienced a 5 percent drop in sales of optical networking systems, including optical fiber.
Several brokerage firms -- including ABN Amro, CS First Boston, and Morgan Stanley -- downgraded Lucent Wednesday morning. PaineWebber and Merrill Lynch cut their earnings forecasts. Goldman Sachs also cut its earnings outlook, but advised clients not to sell Lucent shares at their current depressed level.
One of Lucent's main problems is that the company still has significant exposure to equipment for circuit-switched networks, which are rapidly being replaced by packet-switched networks. Circuit-switched networks were built for voice transmission, while packet-switched ones are better adapted for data transmission, which is exploding because of the growth of the Internet. In the quarter ended Sept. 30, Lucent's circuit-switched equipment business declined 13 percent year-over-year, while its data networking business grew more than 40 percent.
Lucent issues company specific
"We believe that most of the issues impacting Lucent's September quarter results are company specific," Merrill Lynch analyst Michael Ching said in a research note. "Even increasing bad debt reserves because of emerging service provider credit concerns reflects Lucent's aggressive policy towards providing vendor financing."
"Management did outline several actions that they plan to take that should help return the company to more profitability," Ching added. "This will include several hundred million dollars in charges in the December quarter."
Lehman Brothers analyst Steven Levy had a less optimistic outlook about Lucent, however.
"Owning Lucent shares for the next few months, even at what we are expecting to be near fire-sale prices, is not likely to be rewarding in any way," Levy said in a research note called "Lucent's New Hit -- Ooops, I Did it Again."
"The one caveat is that the potential valuation of Lucent's microelectronics business should act as a significant floor for Lucent shares. Therefore, the downside from last night's close at $31.37 is probably no more than 50 percent," Levy added, providing little comfort to Lucent shareholders.
Lucent's problems didn't affect stocks of other networking equipment makers, however. Cisco (CSCO: Research, Estimates) closed up 6 cents at $51.19, while Nortel (NT: Research, Estimates) finished up 94 cents at $60.94, and Juniper (JNPR: Research, Estimates) closed up 6 cents at $206.
Motorola lowers expectations for fourth quarter
After the close Tuesday, Motorola Inc., the world's No. 2 maker of mobile telephones, reported third-quarter earnings and revenue that were in line with analyst expectations. Excluding special charges, Motorola logged earnings from ongoing operations of $598 million, or 26 cents per share, on revenue of $9.5 billion.
However, Motorola dropped a bomb Wednesday morning when it lowered earning forecasts for the fourth quarter and full year, as well as for 2001, blaming slower growth in mobile phone sales and weakness in the euro. The news pushed Motorola's already battered stock to fresh 52-week lows.
In a conference call with industry analysts, the company said it expects to earn 27 cents a share in the fourth quarter, well short of the First Call consensus estimate of 37 cents. Sales are expected to come in at $10.5 billion, versus previous analyst estimates of about $11.3 billion.
Motorola told analysts during the call that it is revising downward its estimate of worldwide industry mobile phone unit sales for 2000 to 410 million to 425 million units, from a previous projection of 425 million to 450 million. The reduced estimate for mobile phone sales hit the stocks of other mobile phone makers, with industry leader Nokia (NOK: Research, Estimates) declining $1.94 to $33.06, and Ericsson (ERICY: Research, Estimates) losing 6 cents to $14.06.
Merrill Lynch's Ching lowered his revenue and earnings expectations for Motorola in response to the conference call. He reduced his fourth-quarter revenue estimate to $10.5 billion from $11.3 billion and his earnings per share estimate to 27 cents from 36 cents. In addition, he cut his fiscal 2001 revenue estimate to $44 billion from $47.2 billion, and his earnings per share forecast for that year to $1.20 from $1.43
The reduced forecast for mobile phone sales "will have a negative impact on two segments, as it will reduce revenue contributions from handsets and it will also likely reduce contributions in the semiconductor business, as Motorola consumes a lot its semiconductors internally," Ching said in a research note.
Yahoo! fails to impress
After Tuesday's close, the Web portal Yahoo! Inc. reported third-quarter earnings that beat analysts' expectations, signaling that the Internet advertising market remains was strong between July and September -- at least for the industry's largest players.
For the quarter ended Sept. 30, the Santa Clara, Calif.-based company said its earnings, before one-time items, totaled $81.1 million, or 13 cents per diluted share, compared with $38.48 million, or 6 cents per share, in the year-ago quarter. Analysts surveyed by earnings tracker First Call had expected the company to earn 12 cents per share.
Yahoo! said its third-quarter revenue rose 90 percent to $295.55 million from $155.86 million a year earlier. Traffic on the company's Web sites averaged 780 million page views per day in September, up from an average of 680 million in June.
While those metrics met or exceeded analyst expectations, the tone of the company's conference call was cautious, raising analysts' concern about its future advertising revenue and marketing expenditures.
"The tone of the conference call was quite cautious," said Lehman Brothers analyst Holly Becker in a research note. "Coupled with a revised outlook on sales and marketing expenditures, it suggests that a re-acceleration of revenue growth will only come at the cost of earnings."
"Even after the recent decline, the stock appears rich at 36 times 2001 revenue and 150 times earnings," Becker added. "We remain cautious on Yahoo! shares in front of several potentially low single-digit growth quarters."
Even Merrill Lynch's Henry Blodget, a long-time and tireless bull on the leading Web stocks, issued cautionary comments on Yahoo! Wednesday, saying that the stock could decline to the $40-to-$50 range over the next three to six months.
"We expect the challenging environment for online advertising to continue into the second quarter 2001, three-to-six months longer than we had originally expected," Blodget said in a research note. "Because of this, we are not able to raise our bottom line estimates."
"We continue to believe Yahoo! will make a good long-term investment," Blodget added. "As a result of the challenging advertising environment, however, we believe the stock could see significant downside in the next three to six months."
Jamie Kiggen, who used to cover Yahoo! for DLJ and now does so for CS First Boston, reduced his three-to-five year growth rate assumption for the company to 30 percent from 50 percent previously.
"However, Yahoo! could easily re-accelerate its growth rate over the next few years, particularly as broadband access becomes more available," Kiggen said.
Other Web stocks hit
The analyst comments about Yahoo! hit other Web stocks too, especially those dependent on advertising revenue. The Goldman Sachs Internet Index declined 8.6 percent Wednesday.
Among the Web leaders losing ground: Amazon (AMZN: Research, Estimates) dropped $2.62 to $27.81, America Online (AOL: Research, Estimates) gave up $2.74 to $54.50, DoubleClick (DCLK: Research, Estimates) lost $3.50 to $21.19, eBay dropped $4.94 to $53, and Lycos (LCOS: Research, Estimates) plunged $11.81 to $39.88.
Inktomi (INKT: Research, Estimates), a maker of Internet infrastructure software, plunged $12.31 to $78.31 after one of its competitors made an acquisition that could heat up competition in the network caching, content distribution, and media broadcasting area. CacheFlow (CFLO: Research, Estimates), a maker of caching appliances, bought privately held Entera Inc. for $440 million. Entera gives CacheFlow the ability to send out streams of information encoded in Microsoft's Windows Media format and Apple's QuickTime format. 
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