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OCTOBER 23, 2003
By Steve Rosenbush Light at the End of Lucent's Tunnel The best news in the telecom giant's return to profitability: It's a beacon of recovery for the entire battered industry In a key sign of the telecom industry's increased stability, equipment maker Lucent Technologies (LU ) on Oct. 22 reported its first profitable quarter since March, 2000. Rising sales of wireless and fixed-phone equipment helped Lucent earn net income of $99 million, or 2 cents a share, on revenue of $2.03 billion, in the fourth fiscal quarter. Lucent expects to achieve sustained profitability sometime in 2004. While the market remains volatile, Chairman and CEO Patricia F. Russo in a conference call with analysts rightly declared the worst is over. "It's time to close a chapter on what has been an extraordinarily challenging, prolonged, and unprecedented period for both Lucent and the industry," Russo said. UNCOLLECTED BILL. This is very good news, a few trouble signs notwithstanding. It's true that Lucent's profit wouldn't have been possible without deep spending cuts. As Russo pointed out on the call, the results reflect sweeping cost reductions, deep restructuring (such as the spin-off of the Agere [AGR.A ] chipmaking unit), and an overhaul of the Lucent supply chain, which now led by former Nortel Networks (NT ) executive Jose Mejia. It's also true that Lucent eked out earnings last quarter by reducing its reserves for bad credit and other contingencies. Nonetheless, the profit is still a powerful signal that telecom is emerging from one of the worst downturns to hit any industry, ever. Lucent managed to report positive earnings even though it failed to collect on a massive bill that has been outstanding since this summer. That bill, which an unnamed customer has yet to pay, was responsible for Lucent's huge disappointment in the third fiscal quarter. Clearly, the fourth-quarter results reflect a broad-based upturn in sales. More important, Lucent got back to the black despite even though capital spending on telecom equipment continues to decline. Customers such as SBC Communications (SBC ) and AT&T (T ) are still operating in a constrained environment, evident in disappointing third-quarter earnings reports that drove down their stock prices on Oct. 21. Yet Lucent, Nortel, Alcatel (ALA ), Cisco (CSCO ), and other suppliers have learned to operate profitably with the current conditions. BOTTOM-LINE BOOST. Just imagine what could happen if the economy truly picks up steam. If telecom-intensive industries such as travel and finance begin to fill empty cubicles with Web-surfing, phone-talking workers, the increase in telecom spending would flow through AT&T and SBC and straight to Lucent's bottom line. If that happens, its operating leverage would be extraordinary. Lucent has cut 75% of its workers over the last few years, and any revenue increase would boost profits enormously. The modest 3% sales gain reported for the fourth quarter was enough to drive Lucent's gross margin to 43%, up from 29% in the third quarter. If the recovery strengthens, telecom profits could explode.  Rosenbush is the Telecom editor for BusinessWeek in New York Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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