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October 11, 2000

Lucent Says 4th-Quarter Earnings Will Miss Already Reduced Estimates
By Shawn Young, The Wall Street Journal

Lucent Next In Line As Tech Wreck Continues ... Weiss comments

NEW YORK - Lucent Technologies Inc. confirmed Wall Street's fears that profits for the fiscal fourth quarter ended Sept. 30 fell far short of already reduced expectations, and said it would also lower its forecast for fiscal 2001 in the coming weeks.

The letdown, the third time this year the telecommunications-equipment maker failed to make its numbers, comes on the heels of speculation in recent weeks that Lucent would miss profit expectations for the quarter and that Chairman and Chief Executive Richard McGinn would resign. Lucent declined to comment about Mr. McGinn, who faces pressure from investors concerned about strategy and management. Lucent wouldn't specify whether it would revise profit or revenue forecasts for the next fiscal year, or both.

In a conference call late Tuesday, Mr. McGinn conceded that Lucent, once again, had miscalculated. "It is clear Lucent must undergo a major retooling," Mr. McGinn said. But he added, "The problems are clearly fixable."

The company, based in Murray Hill, N.J., said it would report revenue of $9.3 billion to $9.4 billion, at the low end of forecasts. It said per-share earnings were in the range of 17 cents to 18 cents a diluted share, compared with 24 cents a year earlier. The First Call/Thompson Financial consensus was that Lucent would earn 27 cents a share.

The current forecast for fiscal 2001 is $1.31 a share. Lucent is scheduled to report fiscal 2000 earnings on Oct. 24.

Mr. McGinn attributed the latest shortfall to weak revenue and margins in fiber-optic systems. Lucent, which has engaged in aggressive financing for telecom start-ups also said it was forced to set aside larger reserves for bad debt for those companies, which recently have run into myriad troubles. Increased competition in the telecom sector has caused a drought of capital as the financial markets sour on the group.

Lucent also blamed a faster-than-expected decline in sales of its more traditional telephone gear.

Mr. McGinn, who has been CEO since Lucent was spun off from AT&T; Corp. in 1996 has sought to put a positive face on the situation. He noted that he and Deborah Hopkins, Lucent's new chief financial officer, have uncovered weaknesses in the company's planning methods that they are trying to repair. The company is also in the process of restructuring, trying to cut costs and directing resources to the high-speed fiber-optic gear that it failed to nurture earlier.

But the question remains whether Mr. McGinn and his team can fix Lucent. So far, Mr. McGinn appears to have the board's support.

Wall Street has pointed the finger at Lucent for falling short on meeting demand for hot new optical-networking equipment, used to shuttle large amounts of video, voice and data traffic at lightning-fast speeds.

"Lucent took too long to address fundamental internal problems," said Sanford C. Bernstein analyst Paul Sagawa. "They were too willing to explain them away."

The market brutally punished Lucent Technologies today as the company issued its third earnings warning in as many quarters. Lucent was the most-traded stock on the NYSE this morning, dropping 30% at the opening, and it has hit price levels it last saw in February of 1998. Even as the stock market's sharp nosedive leveled off, Lucent's stock continued to get hammered.

We've been warning investors of Lucent's gross incompetence for quite some time. But the problems are not isolated to Lucent. It is just the latest company in a long line of technology companies including Intel and Dell to fold at the first sign of an economic slowdown. Like Lucent, many of the companies that sprang up during the tech market's bull run have fundamental internal problems that will bury them as their cash runs out.

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