Elroy,
In 2004, you are basically correct that Lucent was about a 1% operating margin business, although its cash generation was better than that because of the high depreciation. My question is: why would you expect the real margins to stay exactly the same as the business grows?
First of all, ALL of Lucent's growth is coming from the wireless side, which has MUCH higher gross margins. Second, telecom equipment is an R&D heavy, fixed cost kind of business that should be expected to have alot of bottom line leverage. Third, the mix is shifting to next gen products - typically in this industry margins on new technology improve over time. Fourth, I suspect LU sales growth will be better than the 5-7% implied guidance - management said flat at the beginning of FY04 and then turned in 7% growth, plus there is HUGE 3G contract up for grabs at Cingular that LU is perfectly positioned to win a big chunk.
Look, LU is not going to deliver Ericsson sized margins. But then again, it is not PRICED for Ericsson sized margins. |
