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Lucent to restate 4Q
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November 21, 2000: 3:16 p.m. ET
Citing $125M accounting issue, firm to restate 4Q, issues profit warning
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NEW YORK (CNNfn) - Lucent Technologies, the largest U.S. maker of telecommunications equipment, added to the string of disappointing announcements it has issued this year by announcing Tuesday that it may need to restate financial results for its fiscal fourth quarter.
Murray Hill, N.J.-based Lucent said on Tuesday that its auditors had identified a "revenue recognition issue" impacting approximately $125 million of revenue in its fourth quarter ended Sept. 30. The company estimates that the reduction in revenue could lower earnings per share for the quarter by about 2 cents. In addition, Lucent said that it couldn't affirm its financial guidance to investors for its first quarter because of the uncertainty about its actual revenue total.
Lucent (LU: Research, Estimates) originally posted revenue of $9.4 billion and earnings of 18 cents a share during the quarter, beating the reduced expectations of analysts, who were anticipating a profit of 17 cents a share. Before Tuesday's announcement, analysts were expecting Lucent to report net income of 7 cents per share on revenue of $7.6 billion in the first quarter, according to First Call.
The company gave no indication where the revenue issue occurred and said it would not comment further while auditors PricewaterhouseCoopers and its legal counsel, Cravath, Swaine & Moore, complete their review. The company also said it has alerted the Securities and Exchange Commission of the error.
 "We wanted to make this public as soon as we discovered the issue," Chairman Henry Schacht said in a statement. "I have asked our outside auditor and outside counsel to assist us in doing a complete review of this and any related issues."
Down 79 percent from high
Lucent's shares tumbled $3.06 to $17.87 in late afternoon trading Tuesday, reaching their lowest level since January 1998. The company's stock is now 79 percent below its 52-week high of $84.18, shedding about $220 billion of market value from its peak. Lucent is one of the most widely held stocks in the United States, with about 5.3 million shareholders.
Lucent has hit its investors with a string of earnings disappointments this year. Analysts say that the company's problems are related to its high exposure to circuit switching equipment used for voice communications and its late entry into optical networking, which uses photons of lights transmitted over fiber optic cables to transmit data at high speeds.
Lucent said earlier this month it could cut up to 10 percent of its work force, or up to 10,000 jobs, in a bid to streamline its operations and end the series of disappointing earnings results. The company also ousted its chief executive officer in October and warned it expected its first-quarter revenue to decline about 7 percent.
Merrill cuts rating
At least one brokerage, Merrill Lynch, cut its rating on Lucent in response to the news.
Merrill Lynch analyst Michael Ching on Tuesday reduced his long-term rating on Lucent to "accumulate" from "buy" based on the news. In addition, he cut his fiscal 2001 earnings-per-share estimate to 20 cents from 65 cents. He cut his estimate for the December quarter to a loss of 5 cents per share from a profit of 1 cent. "We believe that this action reflects the company's aggressive revenue recognition and financing positions in the past," Ching said in a research note. "With a new management team in place, the review process will likely lead to more conservative revenue growth, and therefore earnings performance, in the near term."
Max Schuetz, optical communications analyst at Thomas Weisel Partners, said on CNNfn that Tuesday's announcement hurts Lucent's credibility, which has already been damaged by its earnings shortfalls.
"Lucent is struggling to regain credibility after missing estimates for two quarters in a row, Schuetz said. "The impact on people's ability to believe Lucent's forecasts and reports will be more significant than the financial impact."
"With a company of Lucent's size and scale, it takes a long time to turn it around," Schuetz added. "This is an oil tanker, and once you start reorganizing it takes a long time to get the oil tanker turned around. Having seen Motorola and Ericsson's reorganizations, it will probably take a year or longer for everything to play out for Lucent." [437K WAV, 437 AIFF]
CS First Boston analyst James Parmelee said that Lucent's turnaround is likely to take 9 to 12 months.
More than half of Lucent's current $59 billion in market value is contained within its successful microelectronics division. Lucent plans to do an initial public offering of that division in March and to spin-off the remainder to shareholders by next summer. Schuetz estimates that the microelectronics division, which has about $4 billion in annual revenue, is worth $35 billion to $40 billion. 
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