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?
Well I never said they would, but LU's own forecast for revenue growth next year is mid-single digits. You don't get much leverage opportunity from mid-single digit revenue growth.
First of all, ALL of Lucent's growth is coming from the wireless side, which has MUCH higher gross margins.
Wireless gross margins are higher than their corporate average, but not as incredible as you imply. And in the just completed quarter wireless equipment was a DRAG on gross margins because it is in the initial phase of the multiyear build out. At the end of the day NT, NOK, MOT and ERICY all make THE SAME wireless equipment, so LU is not going to be able to charge their customers through the nose for it.
Second, telecom equipment is an R&D heavy, fixed cost kind of business that should be expected to have alot of bottom line leverage.
LU is mainly outsourced for manufacturing, so the fixed cost is about the same as any high end tech equipment company.
Third, the mix is shifting to next gen products - typically in this industry margins on new technology improve over time.
In tech equipment, this is always going on. There is nothing about LU in this respect that is difference from NT, SUNW, TEK, IBM, or any large high end tech equipment company.
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.
We shall see. Even if it is better than 7%, say its 10% revenue growth, and you are starting from a 0% base in fiscal 2004 and the industry is competitive, that allows LU to perhaps get to what, a 5% cash operating margin?
Whoop de do!
Personally, I'd invest in VCLK, a pure play internet advertising company forecasting 2005 revenue growth of $210m (40% above 2004E), sporting cash operating margins NOW of 17% and expecting them to expand with revenues, trading at 20x after you remove the net cash per share of $2.80, and being an attractive acquisition candidate for big boys YHOO and GOOG (with their 80x+ PEs, they could acquire VCLK for $25 per share and have it be accretive from day 1). That's a good investment in my book.
VCLK is $9 per share today. Why in the world would you prefer house of cards, funny accounting, pension credit profit plan LU??? |
