The next shoe to drop

On the heels of some recent less-than-rosy forecasts from Nortel and Tellabs, Lucent last week warned that its fiscal fourth-quarter sales will be down 25% from the third quarter.

This dire prediction is drastically lower than the recent expectations of two Wall Street firms. UBS Warburg and Merrill Lynch expected Lucent's fourth quarter revenue to drop 5% and 10%, respectively, from the third quarter (third-quarter revenue was off 16% from the second quarter, deeper than Lucent's forecast of a 10% to 15% drop).

Lucent expects to post a loss of $.45 per share in the fourth quarter vs. analyst expectations of a $.16 per share loss.

Lucent attributed the drop to the continued decline in spending by telecommunication companies, particularly in North America. Analysts say the particular culprit is weak U.S. sales of wireline gear.

On a best-case scenario, the current quarter in the U.S. telecom equipment market will be down 5% to 10% from the second quarter, according to UBS Warburg. July, the first month of the quarter, showed a decline of 18% in orders from the month of April, Warburg states.

Lucent's mobile wireless business, meanwhile, looks "stable," according to Merrill Lynch.

Both firms say Lucent is cutting costs more aggressively than previously indicated in July. Lucent last week said it will now have to make deeper workforce cuts than the 7,000 it announced in July to reach a total headcount of 45,000 by year-end.

Lucent may need to cut deep enough to bring the workforce below 40,000, analysts say.

"We look for the company to reduce headcount beyond the current target of 45,000 by at the end of calendar 2002 by at least 7,500 more people," UBS Warburg stated in a recent bulletin.

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Lucent will announce fourth-quarter results and provide an update on headcount on Oct. 23.

Nortel and Tellabs recently warned of sequential revenue drops of 10% to 15% and 15% to 25%, respectively, for the third quarter. The companies plan to shed more bodies as a result.

Both companies also fingered the weak U.S. wireline market as the primary culprit.

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