Lucent Cites Ailing CLECs' Woes

Fresh from selling off what amounts to its corporate networks division, Lucent Technologies Inc. last week admitted that its zeal for signing all emerging carriers for equipment and professional services has gotten it into some trouble.

Lucent said it anticipates difficulty collecting money owed it by certain competitive local exchange carriers (CLEC) that bought equipment and service on credit from Lucent. The CLEC problem was one of three cited by Lucent in a warning to analysts that earnings for the most recent quarter will be lower than previously reduced estimates. The announcement triggered a sell-off in Lucent's suffering stock.

As if to prove what Lucent was saying, some CLECs last week saw their stock prices tank to near rock bottom. For users, that means some alternative carriers that have promised full fiber buildouts in more cities or new voice and data switch locations linked to rented copper loops may not be able to deliver.

"The CLECs have lost all credibility in the financial community, so they've lost their access to capital," says Tom Nolle, president of CIMI Corp. in Voorhees, N.J.

More so than its rivals, Lucent not only sells gear to emerging carriers but also provides contracts to build and manage their networks, and even configure and supply the equipment the carriers then offer to end users. That effort may have cost Lucent energy elsewhere.

For example, CEO Rich McGinn said Lucent still faces a ramp-up in selling high-speed optical equipment to newer but larger long-haul carriers, even as it has been signing up smaller local carriers with "business models that may be questionable." Lucent's optical sales have been a problem all year since Lucent fell behind Nortel Networks Corp., Cisco Systems Inc. and others in offering OC-192, or 10G bit/sec, transmission systems.

"We missed a product cycle," McGinn said.

While McGinn said Lucent has worked out kinks in optical manufacturing, Lucent Chief Financial Officer Deborah Hopkins said Lucent still needs to "identify high-value opportunities." Statements like that indicate Lucent is still planning its next move, which alarmed some analysts, who paint Lucent as a collection of uncoordinated business units.

CIMI's Nolle says Lucent wasted opportunities to sell its ATM switches acquired from Ascend Communications Inc. to large carriers such as the Bell companies, while pushing voice-over-IP DSL equipment that "they will never accept." Although Lucent said SBC Communications Inc. will buy its ATM switches for its out-of-region, local-services effort, Alcatel and Cisco have won the bulk of SBC's business for its much larger in-region DSL-over-ATM "Project Pronto" buildout.

Some analysts were tiring of Lucent's earnings warnings - three times this year - and whispered that McGinn needs to go.

"What exactly is going on with your OC-192 business?" asked one analyst on a conference call with McGinn last week after complaining that Lucent keeps changing its explanation for why Nortel and Cisco are ahead in optical. Lucent has previously cited production constraints, lack of qualified employees and aggressive pricing by competitors. McGinn now says the main delay is that carriers need to "certify" Lucent's optical equipment.

Rosemary Cochran, an analyst with Vertical Systems Group in Dedham, Mass., thinks Lucent's problems are due to support issues.

"In talking to service providers, we don't find they're having technical problems with Lucent equipment," she says. "It's support issues. [Lucent has] lost a lot of people and doesn't have the ability to backfill all that experience," she says.

Observers say other vendors aren't immune to some of Lucent's financing woes. Brian Costello, president and CEO with Belenos, a firm that helps service providers design networks, says Cisco has approximately $US100 million in financing extended to ICG, a financially troubled Colorado CLEC.

Nolle adds that ADC Telecommunications Inc., Tellabs Operations Inc. and Nortel could be affected by CLEC financing shortfalls.

While projected spending on equipment by CLECs was in the $US13 billion range for 2000, CLEC purchases have slowed recently. That could slow incumbent telephone company spending. "They aren't going to buy as much, because they can just wait and buy the assets of the CLECs that don't make it," Costello says.

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