October 23, 2001
Conference Call Notes
Lucent Technologies Inc.


My review of earnings release:

1. Revenues of $ 5,155 are down from $ 5,819. This is a decrease of $ 664 M and (11.50 %).

2. Lucent says they expect to be profitable and cash flow positive in fiscal year 2002. This appears consistent with prior guidance.

3. Lucent previously guided that Q4’01 GAAP loss would be improved from June 30, 2001. This appears accurate, although I have not seen GAAP loss yet.

4. Expects headcount target of 57,000 to 62,000 employees to be reached by March 31, 2002. Expects industry revenue decline will be 15-to-20 %, and Lucent’s target market to decline by 10 % or more. Expects bottom line improvement for Q1’02 and sequential revenue decline. Seeing early signs of increased spending in certain areas. Revenues believed to show improvement in Q2’02.

5. Expects to reach 35 % gross margins if F2003.

6. Days Sales Outstanding (DSA) improved to 34 days.

7. Capital expenditures targeted at $ 750 M for F2002.

8. Pro-Forma Gross margin is 12.50 %, this is down from 16.50 % in Q3’01 and down from 17.50 % in Q1’01.

9. Research and Development was at 14.50 %, nearing its target of 12.00 %.

10. Short-term debt is $1,135 at Q4’01 compared to $3,215 in Q3’01.

11. Long-term debt is $ 3,274 at Q4’01 compared to $ 2,995 in Q3’01.
Debt to Equity ratio is 40 %. This is down substantially from 31.33 % in Q3’01. Equity seems to have gone down due to an expected reduction of Goodwill. This seems to have caused the Debt/Equity ratio to increase. This is not an unhealthy ratio. According to my notes prior Debt to Equity was 25 % in F2000, 42 % in F1999 and 35 % in F1998.

12. Current Ratio (Current Assets / Current Liabilities) is 1.58. This is similar to the 1.60 at Q3’01 and prior. This is not an unhealthy ratio.

13. Accounts Receivable decreased $ 24 million from Q2’01, yet sales decreased $ 664 M. This should be watched closely as a potential red flag. Accounts Receivable, as a % of Revenues was 21.57 % in F2001, 28 % in F2000, 29 % in F1999 and 23 % in F1998. F2001 is showing us the vendor financing write-offs. I previously commented that the 28 % in F2000 was “very acceptable”. Hence F2001 is improved on that.

14. Inventory decreased $1,448 M. Inventory / Sales Ratio is 17.12 %. This compares to 17.65 % in F2000. Not much of a change, yet Inventory turns is a much better comparison.

15. Gross margin is 15.50 % on ProForma basis and 9.66 % on GAAP basis. This compares to GAAP F2000 of 40.53 %, F1999 of 49.00 % and F1998 of 46.90 %. Lucent has attacked this situation and has a goal of 35.00 % Gross Margins for F2003. Keep in mind that F2002 is a planned rebuilding year.

16. Acid Test Ratio (CA- Inventory)/CL is 1.22 this is a healthy increase from F2000 of 1.01 and F1999 of 1.14. This will be explored further as I will explore the Flow Ratio (CA- Cash)/(CL – STD) and the Cash king Ratio (CF – capex)/Sales.

17. Flow Ratio is desired to be less than 1.25. Current Assets = $ 16,103, Inventory = $ 3,646, Current Liabilities = 10,169 and Short Term Debt = $ 1,135.

Flow Ratio = (16103 – 3646) / (10169 – 1135) = 1.379. The ratio has shown
Improvement from 2.71 in F2000 and 2.99 in F1999.

You can read about Flow Ratio at this link


Conference Call Notes

1. Vendor financing exposure declines 34 %. Results have been successful. Expected 1.1 billion of un-drawn in F2002, this is now guided to 1 billion to be drawn in F2002.

Question and Answer Session

1. Question regarding guidance towards International vs. USA in Q1’02. Henry answered that large North American customers are down for Q4’01 since September 11, 2001. Henry sees a lift in that segment. Wireless has been strong. Large wire line companies are discussing reduced capex. These are already in forecasts according to Henry. Henry’s guidance takes into account September 11, 2001 and industry climate. Lucent did not elaborate on International.

2. UBS Warburg asks to comment on product performance. For example wireless was up 26 % sequentially. Wireless was strong both domestically and internationally. Lucent cannot pinpoint if wireless will remain strong in Q1’02. Optical business was “very strong” but down Quarter to Quarter. Circuit Switching has continued to decline, as did Services Revenue.

3. New family of optical products will be discussed next month at analyst meeting. They see margin improvement from the new wireless and optic products. Domestic revenue was 61 % in Q4’01 from 65 % in Q3’01. This hurt gross margins.

4. Optical fiber sale is proceeding as previously discussed.

5. Cash available was previously guided at 2.0 billion and is now 1.4 billion. Cash number even though it went down is still cash flow positive.

6. Lucent can’t comment of Q1’02 wireless. Said it is too early to tell, but general impression is that Wireless remains strong.

7. Collections for last quarter were $5.5 billion. Part of the decline, about $ 200 mil was due to September 11, 2001. Part of the decline was due to lowered revenues.

8. China showed strength in Q4’01. China was also strong in Q3’01. China expected to remain strong in future.

9. Lucent was asked and declined to give margin guidance for F2002. Lucent was asked about achievability of positive EBITDA in Q2’02. This is required to be achieved to spin-off Agere. Lucent believes and hopes that Agere will be spun-off on or before March 31, 2002.

10. Lucent explained that they have necessary liquidity to achieve goals and profitability in the future. Key issues for Lucent are top lines and margins. Lucent understands achievement of 35 % gross margins in F2003. This will be done via volume, new product introduction and focus on core customers. Lucent claims they have shown execution, via phase 1 execution. Now they will show us Phase 2 execution. Product technologies and customer support strategies will be discussed in early November analyst meeting.


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