Lucent CEO Calls 1999 A Make Or Break Year
INVESTOR'S BUSINESS DAILY
Monday, March 1, 1999
By Michele Hostetler
Lucent Technologies Inc. might have to be as nimble as a start-up to win the networking race.
How fast on its feet can a company with $30 billion in annual revenue and 143,000 employees be? Pretty fast, it seems. It's made 11 acquisitions in two years and last month said it would spend about $20 billion in stock to buy Ascend Communications Inc.
Ascend and most of the other acquisitions are designed to help Lucent - an AT&T Corp. spinoff - grow from a leading maker of phone gear into the leading maker of the new era of so-called ''converged'' networks. Such networks carry voice, data and video transmissions.
With its expanding arsenal, the company aims to win large carrier and service provider accounts, says Lucent Chief Executive Richard McGinn.
''We believe the next 24 months are crucial,'' McGinn said. ''We think 1999 is a launching point for us.''
As recently as a year ago, makers of voice gear and data equipment weren't archrivals. They are now. Lucent is battling for the lead with Cisco Systems Inc., long the largest maker of data networking gear, and Northern Telecom Ltd., long Lucent's biggest rival in the phone gear field.
The stakes are huge. The market just to modernize gear already in use could be worth more than $1 trillion in the next 10 years, says Tom Nolle, president of CIMI Corp., a consulting firm in Vorhees, N.J.
In the next two years, all major service providers, to compete and handle increasing demand, must begin making core network decisions, McGinn says.
These new networks will use optical technology, asynchronous transfer mode technology and Internet protocol technology. Lucent dominates as an optical maker, but ATM and IP haven't been strong suits. ATM has emerged as a preferred way of quickly sending data on networks, while IP refers to the way data are sent over the Internet.
With Ascend, Lucent gets a company strong in ATM. That sale is expected to close in May or June. IP is a Cisco strength.
''1999 is when it's going to become apparent who's going to play in the next game,'' said Lee Doyle, an analyst with International Data Corp. in Framingham, Mass.
Lucent plans to grow aggressively and expand into international markets this year, McGinn says. The company went from almost no overseas sales two years ago to $2.4 billion, or 26% of total sales, in the last quarter.
''We believe (overseas) is essential if we are going to continue to take share,'' McGinn said.
Lucent's revenue could surge to $35 billion in its fiscal 1999 ending Sept. 30, up from $30 billion last year, says Martin Pyykkonen, an analyst at CIBC Oppenheimer in San Francisco. He pegs earnings to rise to $2.29 a share from $1.72.
Ascend's ATM technology and existing customer base are keys to Lucent's data networking future. Lucent can marry ATM with its optical gear, Doyle says.
''They clearly vault themselves into the big leagues of data networking with Ascend,'' Doyle said.
If Lucent had to take another year to develop its own ATM products, it wouldn't have caught up, CIBC's Pyykkonen says. ''They would have missed too many opportunities,'' he said.
Lucent needs ATM products this year, Pyykkonen says. Cisco is slated to start selling new ATM gear in June or July.
''The No. 1 priority,'' said CIMI's Nolle, ''is, 'Thou shalt not lose any big ATM accounts in 1999.' ''
Cisco might have a little more time to move than its rivals, says Frank Dzubeck, president of Communications Network Architects Inc. in Washington, D.C. Lucent needs to integrate Ascend's ATM, while Nortel is dealing with its $7 billion August purchase of Bay Networks.
''Lucent and Nortel will have to focus inward, rather than outward, for the next 12 to 14 months,'' Dzubeck said.
That could be costly for both companies. They need to build their identities, analysts say. And Lucent must beef up its IP expertise.
But Lucent has plenty of strengths, including its services department, analysts say.
The company also has a large installed base of PBX equipment. PBXs are private phone networks used by big companies and governmental agencies. Cisco is trying to break into this market, but it may hit a wall because the market hasn't been the province of data people, Dzubeck says.
No one knows when the data side will become a bigger moneymaker than the voice side for carriers.
Today, 80% of carrier revenue comes from voice traffic and 20% from data. If that number flip-flops in the next few years, then Lucent needs radically new offerings, CIMI's Nolle says.
If there's no huge change, Lucent can stay its course, he says.
McGinn says carriers will see revenue split 50-50 between voice and data in the next five years.
Until then, there'll be a lot of confusion.
''Companies are telling me, 'I don't want decision support. I want to be told what to do,' '' Nolle said.
It's not that easy, McGinn says. Some carriers want to go straight to an ATM-optical core, while others want to add to their existing networks slowly, he says.
''We have to . . . address each one of them,'' McGinn said. ''There is not one way to go. It's determined by business strategies.''
And there aren't just three players. Analysts expect to see moves by such companies as Siemens AG and L.M. Ericcson AB.
''We're seeing all of the titans of telecommunications coming to the U.S. in 1999 to duke it out,'' Nolle said. ''We're going to have a level of competition that we've never seen before.''
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