Thread ---Lucent Technologies Inc.
Dow Jones Newswires -- October 28, 1999
SMARTMONEY.COM: Shedding Light On Lucent
By Alec Appelbaum
Smartmoney.com
NEW YORK (Dow Jones)--Like parents watching their normally rowdy kid spike a fever and turn sluggish, investors may have wondered what was ailing Lucent Technologies (LU) this fall.
Analysts began fretting about a couple of obscure accounting measures, and shares in the communications-equipment giant slumped 27% over 13 weeks. Now the fever seems to have broken: On Tuesday, the company wowed the Street by reporting higher-than-expected sales growth - and perhaps more important, improvements in those accounting statistics. The question now is whether Lucent's problem was just a passing malaise or something more troubling.
So what was worrying Lucent investors? Mostly, it was two lines on the balance sheet: inventories and days sales outstanding, or DSOs. If a company reports high inventories, that means it may be making more than it can sell; if it has high DSOs, that means it may be giving its customers a lot of time pocketed yet. Now, nobody was accusing Lucent of cooking the books. But many analysts have long wondered whether the company could keep its revenue growing at the same breakneck pace. And if growth were to start to slow, where do you think the signs might show up first? Below the headlines, in obscure accounting items like inventories and DSOs.
On the whole, investors have applauded Lucent's evolution from a clubby spinoff of AT&T (T) to a multifaceted networking powerhouse.
But they've always wondered when demand from big businesses would slack off, or when fast-moving rivals would snag new customers. Lucent stoked the suspicion a bit this past spring, at the end of its second quarter, when it disclosed that it had not yet wrapped up two big contracts worth about $800 million - yet its DSOs were rising. That didn't jibe, says portfolio manager Ned Brines of the Phoenix-Engemann Aggressive Growth and Focused Growth funds, whose company holds roughly seven million Lucent shares. If DSOs are rising on a smaller number of sales, then maybe previously reported revenue is coming into the company coffers haphazardly or not at all.
Like all bogeymen, the high DSO number was scariest for what might have been behind it. A high DSO number raises alarms about future growth. After all, a company that is scrambling to meet Wall Street estimates might hand out sweetheart payment terms to customers to boost revenue. So concerns about Lucent's balance sheet, says Paul Sagawa of Sanford Bernstein, were just code for nervousness about continued revenue growth. Similar whispers about sagging future growth also knocked down Cisco Systems (CSCO) last week.
Investors may be talking about auditors' rules, but they're really worried about Newton's law. (By contrast, Nortel Networks (NT), another huge phone-equipment provider, has reported higher DSOs than Lucent, but has driven its stock price up all fall by dishing out detailed product and contract news, allaying growth worries.) As it turns out, Lucent's DSOs might be climbing for perfectly valid reasons that relate to the company's focus on fast-growing markets.
Remember, Lucent was born as a phone-equipment business that got big revenue from big sales of big equipment and grew at a nice, predictable rate. Then the Internet happened, and phone companies started racing to buy the latest equipment to offer Internet and data services over their networks. Cisco came from out of the West to encroach on Lucent's turf. Lucent started making more and more sales to startup carriers and overseas outfits. You'd expect Bell Atlantic (BEL) to pay its bills within 90 days; a company that has no earnings, or that has to convert its currency in and out of zlotys, tends to take longer.
Hence the DSO problem.
Money heals such worries, and this most recent quarter has silenced fears, with its $10 billion in revenue and 20% annual growth. The company also managed to reduce inventories by 3% from the previous quarter and DSOs by two to five days, depending on your methodology. The sight of falling inventories amid so many new sales impressed investors, and Huachen Chen, portfolio manager with the Dresdner/RCM Global Technology fund, took heart in CEO Rich McGinn's promise to increase revenue 3 to 5 percentage points ahead of the market. And the company's focuses on software, optics and consulting promise continued high revenue growth, according to Christin Flynn and Kitty Weldon of the Yankee Group.
These emerging areas won't make Lucent's accounting any more soothing, though, because they can cause considerable DSO discomfort.
Software, especially, can be classified as a service or a product, making it hard to account for consistently. The competition doesn't help: Cisco reports DSOs around half the size of Lucent's, partly because it sells a lot to private businesses that tend to pay bills promptly. Lucent spokesman Jeff Baum warns that DSOs are always going to be somewhat high as long as the company sells to startups and overseas carriers, which are two of its biggest growth areas. But the company seems serious about solving the problem.
Specifically, Phoenix-Engemann's Brines expects the company to convert more energetically customers' past-due bills into loans that it can sell to other investors. Baum says that employees are seeing some of their compensation linked to better revenue collection, and McGinn himself has promised to be more involved in the effort.
So is Lucent safe from a relapse? Like any bellwether stock in a volatile industry, it's vulnerable to rumor and exposed to risk. But bullish analysts felt vindicated by its strong numbers yesterday; Walt Piecyk of PaineWebber challenged the skeptics to produce an example of bad inventory management.
"It's pretty clear that concerns were overblown," he says.
While more fears about revenue growth could produce another case of the blahs for Lucent stock, a quick checkup of its balance sheet makes it look pretty healthy for the long term.
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