NEW YORK – Lucent Technologies Inc. (LU) on Friday cut its revenue forecast for 2006 after missing expectations for the quarter just ended, citing weakness in the United States and China, sending shares lower.
The warning reflects a slowdown in equipment spending by Verizon Communications (VZ) and Sprint Nextel Corp. (S), two of Lucent's biggest customers, rather than weakness in the overall market for telecommunications gear, analysts said.
"Verizon and Sprint account for about 60 percent of the company's wireless revenue," said Susquehanna Financial analyst Joe Chiasson. "The problem is that Verizon did most of its spending in 2004 and 2005 and will be cutting back much of its spending.
"Sprint will be doing more building, but the bulk of the activity has already been done," he added. Wireless gear accounted for 44 percent of Lucent's overall revenue in the fourth quarter.
He added that in the wireline business, Lucent is absent from some of key sectors of growth such as IP routing and voice over IP equipment.
The communications network equipment maker said it expects revenue for the year ending September 30 2006 to be flat or up in the low-single-digit percentage range, down from its previous forecast of a percentage increase in the mid-single digits.
The company also said it sees revenue in its first fiscal quarter ended Dec. 31 of about $2.05 billion, down from the $2.43 billion it reported in the fourth quarter. The Reuters Estimates view is for first-quarter revenue of $2.43 billion on average.
Verizon alone accounted for about 40 percent of Lucent's wireless revenue, said Sanford Bernstein analyst Paul Sagawa. "That's a huge part of your business that's on sabbatical. Obviously Verizon Wireless is very successful and will be spending in the future. They're just not spending today."
Shares fell as much as 8 percent in early trading before taking back much of that decline by midday. Susquehanna's Chiasson attributed the rebound to optimism about the second half.
Lucent recently won a four-year deal to provide network services for Cingular Wireless, the second largest wireless service after Verizon Wireless.
"We think Lucent won about $1.4 billion of about a $4 billion total deal," Bernstein's Sagawa said. ""Lucent has the potential of taking even a larger portion of that. But the issue is Lucent hasn't recognized dime one from that yet."
Lucent said customers continue to invest in the next generation of networks that will be based on its most advanced Internet protocol equipment and called the first quarter "a temporary setback." It also said it expects second-half revenue to be stronger than the first half.
In China, telecommunications companies are reluctant to spend heavily on their networks until the Chinese government decides the recipients of high-speed third generation (3G) licenses.
Shares of Lucent were down 3.7 percent at $2.61 on the New York Stock Exchange, after dropping as low as $2.50 shortly after the opening bell.