Lucent on the ropes

We've heard of throwing the baby out with the bathwater - but the bath too?

When a company is credited with the technology behind the first talking movie, one would assume its place in history is assured. But over the past couple of years, Lucent has been struggling to live up to its past accomplishments. Suzanna Kerridge opens the storybook. First - some history. On Valentine's Day 1876 Elisha Gray was pipped at the post to file a patent for the first telephone. It was his life's work, as joint head of the Western Electric Manufacturing Company, with Enos Barton. But Gray made up for it in the coming years by building up his company to become the largest electrical manufacturing company in the US, responsible for the production of the first commercial electrical typewriter, telegraph equipment and Thomas Edison's electrical pen. By 1881, Gray's company could no longer keep up with the growth of the telephone network and sold a controlling interest to American Bell. Western Electric was given the exclusive contract to develop and manufacture equipment for the Bell telephone company. Over time, Bell turned into AT&T and Western Electric transformed into the Bell Telephone Laboratories which, due to various US regulatory problems, was split into numerous groups. These separate interests, including AT&T Network Systems, Global Business Communications and Microelectronics, eventually formed the present day Lucent. Bell Labs' contribution to the modern world is staggering. It can be credited with inventing talking pictures, producing the electric typewriter, demo-ing the first television, inventing the transistor radio in 1947 and then the Unix operating system in 1969. The company can count 11 Nobel Prize winners on its payroll over the years. Paul Strauss, research manager at IDC, said: "The company's inventions made it one of the largest companies in the world and it would have stayed that way if it had retained its monopoly. But for various reasons, largely to do with US regulations, they gave up a lot of their business." How the mighty have fallen. Today, Lucent is on the ropes. Analysts were highly critical yesterday of its promises to return to profitability by 2002 given its latest quarterly loss of $3.25bn Its banks are probably already preparing for sleepless nights now the company has come, cap in hand, to asking for a $4bn extra credit line to help make the adjustments necessary to bring it back to profitability. Lucent's inability to change with the market demands has led to its current lack of stability. "The company was unable to visualize the tremendous change coming. Sometimes one has to sacrifice the entrenched base in the hope of staying fresh," added Strauss. It's a view shared by his colleague Stirling Perrin, optical research analyst at IDC. He points to Lucent losing its place in the race for higher data transmission speeds in the optical fibre market. He said: "DWDM [a technology which allows greater amounts of information to be sent over often long-distance fibre networks] has been a big problem. In 1999, Lucent was neck and neck with Nortel in this market but it dropped the ball as it couldn't adapt quickly enough. Its rival picked it up." From having a 27 per cent market share, Lucent dropped to just 15 per cent while Nortel shot up to 47 per cent. What's more, its overly generous vendor financing plan has landed it in hot water. Lucent CEO Henry B. Schacht has blamed financing associated with ONE.Tel for depreciating its latest loss per share by 13 cents. Lucent has been reduced to selling property and assets to raise money to pay off mounting debts under the guise of Phase II of its restructuring plan. However, this short-term approach will only serve to cause more trouble in the future, said Mark Blowers, senior research analyst at Butler Group. Selling the family silver leaves less for future generations to inherit. Unfortunately, Schacht does not see it this way. Phase II (the great white hope) releases a significant amount of liquidity, he said. However, it is not enough cash to prevent it from having to convince its creditors to amend its loan agreement. Yet for all the positive noises there are very few hard figures. No top line, bottom line or even revenue projection for the next quarter - let alone next year - has been released. During the financial results conference call, Schacht refused on three separate occasions to offer any guidelines. He grew increasingly tetchy as Wall Street analysts persisted in asking for hard figures. Eventually he snapped: "It won't take rocket science to get there but I simply won't provide guidance of that type right now." Lucent CFO Frank D'Amelio proved more enlightening, stating "return to profitability did not depend on significant revenue growth" through sales. Yet there are only so many property deals one can close or employees to make redundant. Where now? Lucent is far from alone. Competitors such as Ericsson, Nortel and Motorola have been laying off thousands as sales dry up. Even the mighty Cisco has been affected. It is sure to be a hard climb back for Lucent, and even then, it may never scale its past heights. What would the forefathers say? For related news, see:
Lucent goes back to the bank
http://www.silicon.com/a