OK - 4 very busy days later - my take:
1. Underlying demand for LU products remains strong enough to fuel a big 2nd half. There is alot of wireless and optical business cued up to go, IF LU can fulfill the orders (and I think they can).
2. 1Q may continue to be something of a problem in future years, unless LU changes its compensation plan and its revenue recognition policy. So much business was closed in 4Q to make quota, that there was NOTHING closed in October and early November. This degree of backend loading raises the risk that something goes wrong, and if it does, it limits your options for making it up elsewhere. As for revenue recognition, credit to OG - I now agree that LU's policy is dangerous, allowing customers to hold up sales as a negotiating ploy.
3. LU needs to finish its SAP implementation ASAP. I think I have mentioned previously the sorry condition of LU's internal systems - a legacy of the AT&T days. I don't think LU realized it was in deep doo doo until very late in the process, again limiting its options.
4. Once LU did realize the quarter was lost, I believe no heroic effort was made to buttress the Q. In fact, I believe several $100 million in business that might ordinarily made 1Q has been deferred to give a better cushion for 2Q and beyond.
5. Customers really do seem to like the 400G product (10Gbps, 80channel capable). Although some sales will undoubtably be lost as a result of the slowere than expected ramp to volume, many customers will just wait. It is not as though you can show up at NT's backdoor and walk away with a truck load of optical gear - there is a line to get their equipment a couple months long.
6. Actually, there but for the grace of god goes NT - don't believe that it is immune to parts shortages, messy product transitions or poor planning. However, NT's record in 1999 is instructive. A year ago, few liked this stock, now look at it. I almost got back in (remember we pared back at ~$82) but I think we lost our window, and I am a little squeamish about NT at these prices.
7. I sense alot of relief about this stock amongst the buy side. Even those heavily long (like us, 10% of our tech portfolio) were worried about things - it has felt like a sword hanging over the company every quarter. Now that the bad news is on the table, I expect the stock to act better as LU puts a Q or two behind them.
8. I believe LU will be a strong performer for CY00 - even including this disappointment. Rough targets - $70 at the March quarter, $90 if it makes its guidance in June, $120 by September. I could be conservative. |
