Lucent gets some better news

It's no secret that Lucent has lost market share recently, posting lower earnings forecasts four times this year. Deals announced in recent weeks, however, indicate that Lucent may be making up for lost ground.

Lucent Technologies finally had some good news to report - $275 million in equipment deals and the $2.5 billion sale of its Power division to Tyco.

Lucent has lowered earnings forecasts four times this year, booted its CEO Rich McGinn last month and now faces the daunting task of restructuring itself while trying to collect on $1.3 billion in loans to its customers.

"They're going to have to continue to land these deals while they figure out how to reinvent their company," said Bill Lesieur, industry watcher for Technology Business Research.

The Power division sale will provide much-needed cash and will help Lucent clarify its focus on high-growth broadband and mobile Internet infrastructure. The planned spin off of its microelectronics division will cement that strategy.

According to RHK Inc., Lucent this year lost market share in both dense-wave division multiplex and Sonet equipment.

"There's no secret this is the area where we faltered a little bit," Lucent spokeswoman Mary Ward said.

Still, Lucent remains the leader worldwide in DWDM equipment, with components in use in 7,000 systems, Ward said. In the overall North American optical transport market, Lucent remains in second place, with 14 percent of the share to Nortel's 38 percent, says RHK.

And deals announced in recent weeks indicate Lucent may be making up for any lost ground.

In a five-year $200 million agreement, Lucent will supply digital subscriber lines and other last-mile equipment for the IP Communications' voice-over-IP network in the Midwest and Southwest.

Lucent also will supply $75 million in 10-gigabit and dense-wave multiplexing equipment to Telecom Italia and has landed a contract to supply high-capacity optical technology for KDDI's backbone connecting Hokkaido to Okinawa, Japan.

"It's definitely encouraging news," Yankee Group analyst Alex Benik said. "These contracts are certainly significant for Lucent. There haven't been too many in the optical space."

Lucent also announced a trial of its 40-billion-bits per second optical technology on a 50-mile fiber link connecting Brussels and Antwerp on Global Crossing's European network. The 40-gig trial is four times speedier than today's fastest commercially available systems. Also, Lucent said it has completed a stage of ZAO Company's 23,000-mile trans-Russia network. Throw in the Oct. 17 five-year $800 million contract to provide fiber to the home for WINfirst, and Lucent is on something of a streak.

The $200 million contract with IP Communications lost a little luster when analysts learned that Lucent will finance $182 million of the deal.

Still, sharing the capital risk when building out a network is sound practice, say analysts, noting that Nortel and Cisco have done the same recently in deals with service providers. But when a company like Lucent finances 90 percent of its latest deal, after having trouble collecting loan repayments from previous customers, that carries some extra risk.

Lucent has extended $7.7 billion in credit to customers, of which about $1.3 billion has been used, according to Technology Business Research. Cisco has extended $1.8 billion to its customers, about $600 million has been used.

Such arrangements raise the question of whether the dollar amounts in the headlines are truly new revenue growth, Lesieur said.

Dealmakers are like sharks sniffing for blood, and with Lucent, they may sense they have the leverage to demand favorable financing, Lesieur said. They may wait until the last day of the quarter to make a deal or make a loan payment, disrupting the company's cash flow. "It must be very difficult to negotiate contracts when you're down," he said.

IP communications picked Lucent because it had the best technology, not because of the generous financing, said IP chief operating officer Sean Minter. "We looked at the Lucent, Cisco and Nortel products, and Lucent was by far the farthest ahead" in DSL access devices.

Just as important as the contract announcements to Lucent are the changes in leadership structure made this week to streamline decision-making and reduce the number of people reporting directly to Henry Schacht, who was called back from Avaya Communications to resume his role as CEO at Lucent, Ward said.

Vice chairman Ben Verwaaayen will be responsible for world-wide marketing, sales and services; Bob Holder, previously executive vice president, will be in charge of product organizations, manufacturing and supply chain management; CFO Deborah Hopkins will develop the information systems infrastructure to support the restructured Lucent.

"The sales and service teams have been integrated into one" to help keep very senior managers better informed about what customers need, Ward said. "It will improve the capability of the company to address the needs of customers."