Gary,
observations:
1. I have in previous posts identified what I think was the cause of the revenue short fall and I hold to those conclusions. BTW most on the street were expecting $11 - $11.3B so the shortfall was $1.2 to $1.5B not $2B.
2. People are alternately giving LU too much credit for control (financial engineering to pull sales forward to prop up an artificially high growth rate) then too little (accusations that LU has no understanding of customer needs).
3. The market tends to overreact - for a good example check out NT's chart from late 98, or IBM from about 3 months ago. For all of you who are saying things like - "fire McGinn" or "LU is losing its position with customers" - talk to some carrier customers.
4. The rise in receivables is a key point in this debate. I have talked to about a dozen LU carrier sales people - in mid '98 Carly decided to simplify sales comp, and eliminated collections as an element of incentive. I believe this is the root cause - that and the $7B Saudi contract.
5. MF seems to think LU has warehouses full of finished CO switches it can't sell. This is silly. Almost everything LU makes is made to specific customer order. The rise in finished goods inventory sure seems to me like customers taking longer to accept. Gary, I agree that the revenue recognition policy tempts customers to use it as leverage and should be changed to match industry norms. I think you are taking it a little far in saying it does not allow them to compete in the fast paced market - why would that be? It creates more risk around quarterly results for investors, but certainly doesn't put them at disadvantage for winning business.
6. The big rise in balance sheet items occured exactly one year ago - check the financials. Since then it has stabilized and begun to slowly improve. The absolute levels of inventory+receivables days outstanding is considerably better than industry darling NT. If you don't like LU's balance sheet, then you will hate NT's.
7. Personally, I think most of the analyses of the balance sheet have been poorly done (chuzz aside) and used to draw strange conclusions. For me, the key aspect about the balance sheet relates to its impact on cash flow NOT earnings. I'll go out on a limb - I don't think the 1Q sales and EPS miss was at all related to balance sheet issues - it is largely a coincidence.
8. While I think slower circuit switch sales were a big reason why LU missed MY expectations, LU claims that it was expecting CO switch sales slowing from the big growth in FY99 and that it had been forcasting a 120% YoY increase in optical which was nearly cut in half due to the supply problems (I was modeling a 75% increase). While LU grew circuit switching sales in the low teens in FY99, mid to low single digits is probably right for FY00 (including packet upgrades to 7R/E)
9. The big financing deals are NOT CO switches - wireless is by far the biggest culprit, followed by data networking gear. I believe your thesis about financing "propping up" circuit switches to be flat wrong.
10. If I were Rich McGinn, my response to this quarter would be: change revenue recognition policy (involves a one time credit), get SAP implementation finished ASAP, get a new CFO who can talk to the street. |
