IN THE MONEY: Lucent's Credibility Takes A Hit 0
12 Mar 16:39
By Michael Rapoport
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--Lucent Technologies Inc. (LU) is relearning an old, old
lesson: Don't make promises you can't keep.
Count the past promises that Lucent broke on Tuesday, when it scaled back its
financial forecast. The promise of sequential revenue growth of 10% to 15% this
quarter? Broken. The promises of restored profitability and positive cash flow
in fiscal 2002, which Lucent has publicly expected ever since last July?
Broken. The expectation of spinning off the company's remaining stake in Agere
Systems Inc. (AGRA) to shareholders without further delay? Broken.
And this even though Lucent reaffirmed its revenue and profitability
forecasts a scant three weeks ago.
Lucent says things have taken a turn for the worse in the past few weeks in a
tough telecom-equipment market, and notes that it still expects its results to
show improvement even under its revised forecast. Fine. But after these latest
disappointments, and with a track record of moving the goalposts for investors
a number of times in the not-distant past, you have to wonder how much
credibility with investors Lucent has left.
"This is not that great a way for Pat Russo (Lucent's new chief executive) to
start," said Steve Levy, a Lehman Brothers analyst. Levy himself likes Lucent's
stock and thinks the company's business will eventually come back, but he calls
the Tuesday announcement "clearly disappointing" and "a little surprising given
management's recent comments."
Lucent Chairman Henry Schacht thinks the company's credibility actually
benefits from its prompt disclosure that it wouldn't reach its targets. "I
think our credibility is enhanced, that as soon as we see a change, even if
it's modest ... we say it," Schacht said in an interview.
He noted that even with the scaled-back outlook, Lucent is still expecting
its fifth straight quarterof sequential improvement on the bottom line. "I
think it's still a 'plus' story," Schacht said. "It's not quite as good as we
thought it would be."
That's a glass-half-full view. Here's the half-empty version.
Lucent, which had projected sequential revenue growth of 10% to 15% even with
the telecom-equipment industry in a crushing downturn, has now been forced to
scale back that projection to a "modest-to-10%" improvement, as the large
service providers on whom Lucent now depends hold back on spending. In turn,
the company says, that means that the fiscal 2002 profitability and positive
cash flow it had predicted several times will now "likely" slip into fiscal
2003, which begins this October.
And the spinoff of Agere, which had already been delayed once? Again because
of the anticipated revenue shortfall, Lucent acknowledged Tuesday that it won't
have positive EBITDA - earnings before interest, taxes, depreciation and
amortization - in its current second fiscal quarter. That means it hasn't met a
key precondition in its bank-credit agreement for spinning off Agere (a
possibility previously suggested more than once in this column), and so the
spinoff has to be delayed for another quarter.
A few questions here: First, why was Lucent predicting revenue growth of 10%
to 15% in the first place, when competitors like Nortel Networks Corp. (NT)
were projecting sequential declines? Lucent is blaming market conditions that
have deteriorated in the past few weeks, but surely the telecom industry was in
the doldrums long before Feb. 20, the last time Lucent affirmed that forecast.
Second: Lucent is raising the possibility that further spending cuts may be
needed - something that could represent its third restructuring since the
beginning of 2001. Where would those cuts come from? Lucent wouldn't speculate,
saying only that it would take "appropriate action" if necessary.
And third: Could and should Lucent have disclosed more information to alert
investors to the very real risk, evident well in advance, that the Agere
spinoff would have to be delayed?
This has to do with the requirement in Lucent's credit facility that the
company show positive EBITDA in the quarter before the Agere spinoff. The
problem is that Lucent doesn't disclose its EBITDA figures, or provide details
of how it's calculated - and so investors have no way of gauging the company's
progress toward meeting that requirement. Lucent's EBITDA formula (which
adjusts for a number of things beyond interest, taxes, depreciation and
amortization) is publicly available, but it's so convoluted and confusing that
it's virtually impossible for an outsider to determine with certainty what's
included in the calculation and what's not.
But as this column has reported, for instance, a highly unofficial
calculation shows Lucent with EBITDA of negative $722 million in the quarter
that ended in December. From that, it's pretty clear that Lucent ran a risk of
not reaching positive EBITDA in the March quarter, as Lucent was anticipating.
Lucent did say in January that market conditions had created "a degree of
uncertainty" about the timing of the Agere spinoff. But it's steadfastly
refused to disclose more information about where its EBITDA stood. That's a
material issue on which Lucent hasn't provided enough disclosure - and in the
brave new post-Enron world, when investors are demanding more corporate
disclosure, that's hard for Lucent to justify.
To its credit, Lucent may be on the verge of providing more disclosure.
Schacht and Frank D'Amelio, Lucent's chief financial officer, both said the
company is thinking about providing more information on EBITDA with its fiscal
second-quarter earnings to be announced in April.
That would certainly be welcome, and might help restore investor confidence
in the company. And Lucent now says it's "likely" to meet the EBITDA
requirement in the fiscal third quarter ending in June, and thus to spin off
Agere shortly thereafter.
But now the credibility issue rears its head again. Given Lucent's broken
promises, how can we trust that prediction now? Especially since most people
don't expect the besieged telecommunications industry to recover until the
second (calendar) half of 2002, or even 2003, and especially given the way in
which the ground has shifted under Lucent investors - the constantly revised
earnings forecasts back in 2000, the restructurings, the Agere-spinoff delays.
Schacht maintains investors can trust Lucent - he notes that this is the
first time Lucent has scaled back estimates since he came out of retirement to
lead the company in late 2000. "I take great pride in my credibility," he said.
"I feel we have done exactly what we said we were going to do."
Maybe he's right. But it's worth noting that even after all Lucent's moves to
right itself, its stock is still barely half a buck above its all-time low of
$5 a share. Until Lucent proves it can follow through on all its promises, it's
not likely to climb much higher.
-By Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(END) DOW JONES NEWS 03-12-02
04:39 PM |
