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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: hitesh puri who wrote (12399)	1/7/2000 4:33:00 PM
From: abbigail	Read Replies (1) \| Respond to of 21876

Plot the share prices of the three from 9/99 to today. I do not know if this will make your decision easier but, it will make you sick. I think they were all around $70. Abbigail

To: hitesh puri who wrote (12399)	1/7/2000 4:34:00 PM
From: Sawtooth	Read Replies (1) \| Respond to of 21876

Good summary, Hitesh; I'm with you on that line of thinking. Added some LU this afternoon. ....VVVVVVVVVVVVVV

To: hitesh puri who wrote (12399)	1/7/2000 8:54:00 PM
From: Maverick	Respond to of 21876

SSB Research:LU's 2H00 may be too agressive,12-mo target $50 Excerpts follow: Our rating & thesis was based on fact LU could capture premium multiple due to mkt shr leadership, defensible franchise & consistent fin'l performance. But,ests & rating reduced to 3-M from 1-M after profit warning THIS IS NOT AN INDUSTRY ISSUE. Unique to Lucent much like specific issues led to profit warnings at NT in Sep98 and ERICY in Dec98 & Mar99. Execution issues to penalize LU's revs & earnings growth over the next several months * While it's 1st profit warning after better than expected results since Spring 96 debut & outlook for Mar qtr realistic, LU's 2nd half guidance may be too aggressive * We est FY00 EPS may be closer to $1.30 vs. co guidance of $1.45 & our previous $1.55 est & FY01 likely closer to $1.65 as opposed to $1.90. LU could trade >than 30x forward EPS, indicating a 12 mo price tgt of $50. The company's press release and management conference call intimated earnings would be closer to $1.45 and fall short of our $1.55 consensus estimates. This guidance, in our opinion, however, requires a 2nd half that would be characterized by a rather steep ramp. While Lucent certainly has the management team to successfully achieve these goals and the March quarter expectations are at a sufficiently low level,there are enough near-term milestones to achieve in order to realize steep acceleration in earnings inherent in the company's guidance. Thus, we believe $1.30 and $1.65 per share may be more realistic earnings projection for the 2000 & 2001 fiscal years, respectively. We had initially granted Lucent Technologies a 1-M rating. Our optimistic view was based on the company commanding a premium valuation not only to the S&P500 but also to its peers because of strong industry fundamentals combined with the company's market share leadership, defensible franchise and consistent financial performance. Since part of our thesis is no longer valid, we are changing our rating on the stock from 1-M to a 3-M. We believe the stock could continue to trade at a multiple of at least 30 times forward earnings, indicating a $50 12-month price target. SHORTFALL DRIVEN BY PRODUCT DEMAND & DEPLOYMENT PLAN SHIFTS There were four factors driving the shortfall in expectations. The combination of these 3 revenue issues and their attendant impact on profitability will have a material negative impact to earnings. In terms of revenue, these issues will reduce our projected top line growth for Lucent from 18% in FY2000 to more like 13%. Though our growth assumptions for FY2001 are relatively unchanged. If we were to guestimate the impact of these three issues, we would assume that about 50% would be due to manufacturing, 25% for changes in its customers implementations plans, and 25% for lower software revenue, althoug the manufacturing and lower software revenue likely had a disproportionate impact on profitability. MANUFACTURING/EXECUTION. While the demand for Lucent's optical products remained strong, a greater than expected shift toward Lucent's 80 channel DWDM, especially with OC-192 interfaces, and away from the 16 channel DWDM system penalized revenue growth and raised its operating costs. The execution issues were characterized by Lucent's inability to ramp manufacturing of new products, while the older products declined substantially. The difficulties in manufacturing were related to: a) availability of components to produce the OC-192 interfaces for the 80 channel system. The issue was not that there was a parts shortage but by the time Lucent placed its order for parts, it was too late to have a positive impact on the quarter; b) an insufficient amount of test equipment had been deployed; and c) Lucent was not able to train a sufficient number of technicians qualified to install DWDM systems. The good news is market demand is very strong: the DWDM business was up 100% YOY and the overall optical market was up 40% YOY. CHANGES IN IMPLEMENTATIONS PLANS. There was a delay in the spending plans by some of Lucent's customers and some of the revenue could not be recognized: 1) Some of Lucent's smaller to mid-size CLEC customers outside of the United States were unable to close and finalize their financing arrangements with 3rd parties in time for Lucent to be able to record sales in the quarter; 2) Some albeit small may have been related to Y2K issues; and 3) There was one customer, which experienced a management change at the top and a moratorium was placed on spending until the incoming CEO had an opportunity to review the budget. LOWER SOFTWARE REVENUE. The December quarter historically was characterized by heavy software sales. In fact, Lucent at one time generated 85% of its earnings in that quarter. The company has made a concerted effort over the last few years to reduce its dependence on that quarter. In fact, the company changed its fiscal year from December to September in order to: pull business into September, push business into March and reduce its customers ability to extract better terms at the last minute. In addition to its own attempts to reduce its earnings concentration, Lucent's customers also have been moving toward a more equal distribution of its purchases. The good news is that software revenues should be recognized throughout the remainder of the year to bring full fiscal year gross margins to expected levels in the high 40s. GROSS MARGINS. The aforementioned three items that impacted revenue would obviously have a material impact to gross margin, especially with respect to the software sales. As a result of new products in the mix and lower software revenues, gross margins in the December quarter as well as the full year will be lower than expected.