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At Lucent, "We Have Work to Do"

It's not much fun being a telecom-equipment maker when telecoms aren't buying much new equipment. Just ask Lucent Technologies. In the fourth fiscal quarter, which ended Sept. 30, its sales plummeted 56%, to $2.28 billion, vs. $5.16 billion in the year-ago quarter. And things will remain rough next year, with revenues expected to drop some 20%.

Such dire projections make Lucent's promise to shareholders that it would break even in 2003 seem almost impossible to fulfill. Indeed, Lucent's liquidity remains investors' biggest concern. The stock (LU) is trading at $1.45, up 164% from its low of 55 cents in October but way off its 52-week high of $7.50. Lucent is now considering a reverse split to avoid being delisted.

Bill O'Shea, executive vice-president for corporate strategy and marketing and president of Bell Labs, is one of those charged with honoring that vow to shareholders. Among Lucent's efforts: cutting costs -- including reducing the workforce by some 25,000 -- and looking to such nontraditional areas as services to boost revenues. (see BW Online, 12/19/02, "Lucent Looks Longingly at Services").

O'Shea recently spoke about Lucent's turnaround strategy with BusinessWeek Online Reporter Olga Kharif. Edited excerpts of the interview follow:

Q: Your goal is to exit 2003 at breakeven and with $2 billion in cash. Some analysts don't believe that's attainable. Do you?

A: From a financial perspective, we look to get the run rate of our business up to $2.5 billion-or-better range and generate mid-30% gross margins by the end of the fiscal year [September 30, 2003]. And we have a restructuring plan that we've put into place last quarter that gets our costs and expenses aligned so we generate mid-30% gross margins and positive earnings and cash flow.

We obviously have work to do, in this kind of an environment, to achieve it. But we've done many of the things we said we would do already.

Q: How far along is Lucent in its restructuring?

A: We've done a lot. But as we've gone through the restructuring, we've been careful to make sure that we've maintained the capabilities -- human, financial, and technical -- to be able to address the nearest and clearest market opportunities in the years to come.

Q: What's your vision for the company?

A: We're focused particularly on our core strengths in optical, packet switching, and mobility networks. And we're focused on something that we think we're uniquely positioned to do: providing next-generation support software to allow our customers to operate those networks.

Finally, a new focus is on our services business -- everything from deployment services to maintenance to professional services. We hope our customers will outsource parts of their operations to us. We think that's an area where we have strength today, and it's a huge opportunity.

Q: Why are so many equipment suppliers jumping into services?

A: Our customers have been cutting back on capital expenditures dramatically in the past couple of years, and their budgets continue to be tight. Today, they're focused on reducing their overall operating expense. We think through services [we can] help them reduce their operating expenses and get more bang for the buck out of their current network investment [by utilizing] some of our technologies, delivered as part of a service offering.

It's a very fragmented business, so there's opportunity to consolidate that whole market and to take advantage of what we think will be growth over the next five to seven years.

Q: How do you expect services to grow as a percentage of your revenue?

A: We haven't made that projection. We have said that we would like, in the next few years, to see services as 30% of our revenue, but we have not put growth projections against that.

Q: You recently expanded your partnership with server king Sun Microsystems (SUNW). Do you expect strategic partnerships like that to become more important?

A: You'll see us announcing more partnerships. In this environment, nobody can do everything. There just isn't the capacity to do everything on an end-to-end basis. So you'll see us going much more aggressively to fill in our offerings and provide capabilities that our customers want.

There's a real need for our customers to understand how to sell their end products and services to the enterprise customers, who are their biggest users. And companies like Sun, which have this deep and broad experience, help us with that.

Q: Recently, there has been talk that a defense company has been conducting due diligence of Lucent. Are you open to being acquired?

A: We're completely focused on implementing our turnaround plan -- we think it's a doable plan. That's where we're spending our time. Now what would happen "if"? I don't know. Nothing has happened up until this point, and we're not wasting our time trying to think about it.

Q: So you plan to accomplish the turnaround alone?

A: Our plan is to do it alone. Would we have to, if someone approached us, at least understand and consider a legitimate offer? Of course. But that by no means indicates the company is up for sale or merger.

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