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Fall has lived up to its name in the telecommunications equipment sector, with the CEO of troubled Lucent Technologies getting toppled amid a stock market cold front that chilled more than one broadband enterprise.
Lucent CEO Rich McGinn was handed his walking papers after a company board summit that ended months of speculation on his employment future, which followed a series of earnings disappointments that triggered a plunging stock price. Former Lucent chairman Henry Schacht was appointed acting CEO after the Oct. 22-23 summit, which came as the struggling company-known as much for its broadband technology innovations as its apparent inability to capitalize on them-continued trying to reshuffle its business deck.
The board also canceled the search for a new chief operating officer and confirmed ongoing talk that its power systems business was being put on the block. Lucent also will follow through on earlier plans to spin off its prized microelectronics unit, which comes in the wake of a spinoff of its slow-growing corporate networking business dubbed Avaya.
These moves ostensibly are prompted by the marked decline of Lucent's stock price from a March high of $75 per share the low 20s by late October. Lucent endured a further chill after repeated disclosures that its earnings would be lower than expected not only for the recently completed fourth fiscal quarter but also for its current quarter, the three months ending Dec. 31-would be lower than expected. Company officials blame the off earnings on a sagging market for traditional narrowband voice equipment and its late entry into the booming optical equipment market, which allowed rivals including Cisco Systems Inc. and Nortel Networks to gain a strong lead.
But Lucent is not alone in seeing a stock cooling. Although it reported a fairly strong third-quarter result, Motorola Inc.'s stock has also continued to trend down from a March high of $61.54 per share. Third-quarter results show a jump in earnings to $598 million from $361 million in Q3 1999.
The downward stock trend among many communications equipment makers has to do not only with the new Wall Street technology pessimism but also their own sales strategies, according to Greg Hoelscher, industry manager of the wireline networks and transmission group at Frost and Sullivan.
First, previously rosy stock prices declined as investors become more realistic about stock value relative to company profits and revenue projections. "Now that people are taking a closer look," Hoelscher says. "Instead of valuing a company at some outrageous hundred, thousand or a million times their earning, that's going down. When people are not as optimistic as they were, you are not going to value any company as highly."
Some equipment makers also have been hurt by extending credit to network clients, which are themselves struggling-and that has raised questions as to whether the clients will produce the expected revenue. In addition, the shift toward Internet Protocol networks creates a transient weakness in overall results as equipment vendors start switching over their product lines.
"That's definitely a part of it. As they are starting to sell more fiber optic and next-generation IP equipment, it is cannibalizing their circuit-based network sales," Hoelscher says. "I'm one of the ones who believes companies like this have to periodically tear themselves apart. In the long term, it is a necessary thing, but it's always in the short term where we see the stocks go nuts."
Example: PaineWebber analyst Walt Piecyk notes for example that while Lucent is offering OC-192 optical products, slow market acceptance of its line caused an estimated $250 million impact on quarterly earnings. "In our view, Lucent's problems in optical reflect poor execution but do not signal a slowdown in the underlying industry spending in optical."
As a result, not all telecommunications equipment makers are laboring under a deep freeze. Lisle, Ill.-based Tellabs trumpeted record third-quarter earnings, which totaled $210.4 million compared to $141 million posted in the third quarter of 1999. Company officials say they are on track toward 30 percent earnings growth and 40 percent revenue growth for 2000.
In contrast to Lucent, its optical networking income rose 62.5 percent, totaling $544.5 million. Its broadband access products netted $203.8 million, a 34.5 percent increase.
Nortel, meanwhile, had a mixed bag. Its earnings rose 64 percent for the third quarter, but a drop in sales and lower-than-estimated earnings per share cooled its stock prices.
The company has continued to build its optical equipment business, which increased 90 percent compared to last year. Part of that growth is a hefty $1 billion optical equipment supply deal with Aerie Networks, a Denver-based broadband network startup. The four-year supply deal will call for Nortel to supply optical Internet equipment and services for Aerie's 20,000-mile network, which will run along gas pipeline rights-of-way.
Even Lucent, for all its struggles, is showing signs of warmth. The company recently heralded a five-year, $800 million deal with cable overbuilder WINFirst for a fiber-to-the-home optical access network-providing voice, video and data services-based on Internet Protocol and Fast Ethernet standards.
Lucent also landed a role as SBC's primary contractor for its national network expansion, a five-year deal valued at about $1 billion.
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