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SCMP Reporter

Analysts fear Lucent Technologies' sweeping measures to lower its cost structure to cope with falling revenue streams may not be enough to stave off collapse if market conditions deteriorate further.

Lucent urgently needed to discontinue unprofitable product lines and focus on a smaller product portfolio as well as speed up its plans for 10,000 additional job cuts, they said.

Robert W Baird & Co analyst Theodore Moreau said: 'There is no guarantee that stabilisation of the market will come. It is teetering one way or the other.

'If things get worse, it will need reorganisation or recapitalisation. Chapter 11 bankruptcy could be a possibility,' he said.

It was not a pretty picture for any telecommunications equipment company and analysts were not surprised when Lucent followed Nortel Networks in issuing its second profit warning for the quarter - to the end of last month - and announced more job cuts.

Last month, Lucent warned it would have to take measures to bring its break-even level down further. It expected its fourth-quarter pro forma loss per share to widen to 65 US cents, burdened by some US$4 billion in new charges. This compared with a previous forecast of a 45 US cent loss.

The charges include US$1 billion in costs for 10,000 additional job cuts to lower its workforce to 35,000 late this year and a US$3-billion charge to equity due to a decline in assets in its management pension plan.

The drop in pension assets was primarily a result of steep falls in the equity markets.

As with most technology companies, Lucent urgently needs an economic upturn to prompt telecoms vendors to invest in new networks, but in the meantime, it is facing a massive uphill struggle.

Analysts were left confused that the company made a very specific revenue forecast for next year despite the lack of visibility in its markets.

Lucent forecasts sales will fall 20 per cent next year, suggesting revenues of between US$9.8 billion and US$10 billion, but management did not indicate how it planned to keep to this target when the company - as with the rest of the industry - had no idea when the market would stabilise.

One analyst complained of a 'disconnection' between the forecast and lack of details for implementation, saying: 'They didn't provide any meat to the bone of the story.'

For certain, Lucent needed to narrow its product focus and limit its market share because it could not afford to run such a wide variety of product initiatives in so many markets, analysts said.

Mr Moreau expected it to pull out of the access and optical networking business, and to maintain its wireless, services and support operations.

'It will come out of it as a smaller and more nimble company,' Mr Moreau predicted.

Prudential Securities analyst Inder Singh expects Lucent to prune its optical networking business and to look hard at its access and data products.

'If they're not number one or two in a market and the market is not expected to recover in a year and a half, why be in it?' he asked.

But Lucent has been dragging its feet as far as Mr Singh is concerned and he is looking for it to act faster.

'The company understands the cost structure needs to come down, but it is going about it more slowly than I would have liked,' he said.

Lucent has indicated it would complete the 10,000 job cuts towards the end of next year, but Mr Singh would prefer to see it implement the lay-offs within a couple of quarters.
He would also be more comfortable with a smaller workforce at Lucent.
'The company needs a safety margin, closer to 30,000 [compared with the planned 35,000],' he said.
While not facing a cash crunch in the near term, some outstanding financing issues - including US$3.2 billion in long-term debt and a US$1.8 billion convertible preferred bond - could become a cause for concern, analysts said.



Lucent risks collapse despite cuts