Wall Street has seen enough of the bad

Lucent

(LU)

. Now it wants to believe there's a good Lucent.

And at some point, maybe in the course of its

seven-step recovery program, Lucent Technologies will start to show signs that it has exorcised its operational demons. But delving into the details of the company's strategy Wednesday, some investors came away concerned that evil may also lurk in the financials.

Poor Visibility

After the world's top communications-equipment maker turned in its fifth successive disappointing quarter, company executives outlined on a conference call with analysts some of the steps Lucent will take to return to sustainable profitability. Pointedly, though, the company offered no specific growth forecasts, other than to say each quarter will improve sequentially.

These were hard words to accept from a company that Wednesday missed its own recently lowered profit and sales expectations for the fiscal first quarter. Revenue, for example, fell 26% from a year ago, leaving the company some $740 million short of the $6.58 billion consensus target, according to

First Call/Thomson Financial

.

And then came the self-mutilation, to the tune of 16,000 people. In addition to lopping off 10,000 or more jobs, the company said it would sell major manufacturing plants in Columbus, Ohio and Oklahoma City. Although no buyers were named, Lucent expects the sale to be completed by the end of the year, meaning an additional 6,000 workers will be cut from the payroll, presumably to be hired by the buyer of the plants.

The Hard Facts

But that was just the surface. Seething just beneath were the following ugly truths:

  • Some customers stopped paying. Lucent said the problem intensified at the end of the quarter, cutting dramatically into revenue. This is evident in the steep jump in days' sales outstanding, a measure of accounts receivable that counts the number of days between the time a product is shipped and when payment is received. The company had battled for several quarters to get below 100, but saw the figure jump to 130 in the first quarter.
  • Inventory piled up. Inventory levels jumped 21% in the latest quarter, raising concerns not only that Lucent can't sell equipment, but that healthy suppliers such as JDS Uniphase (JDSU) will soon feel sales pressure. JDS supplies components to Lucent, so dramatic inventory increases on Lucent's end suggest a coming pullback in demand for the component makers' goods. Inventories increased by $1.2 billion from fourth-quarter levels "due to sales not realized," Lucent CFO Deborah Hopkins said on the conference call.
  • Lucent went out of its way to raise cash. Lucent sold $1.1 billion worth of receivables, comprising $600 million in accounts receivable and $500 million of notes on loans to customers, or vendor financing. Though not unheard of, selling receivables certainly represents an unorthodox means of raising cash in the telecom business. The sale means Lucent decided it was better to get an estimated 95 cents on the dollar now rather than wait for the full $1 due at the end of its customers' pay period.
  • Gross margins plunged. Margins for the fiscal first quarter dropped an eye-popping 15 percentage points from fourth-quarter levels, hitting 22%. Lucent attributed the dramatic erosion primarily to lower software sales. With so many of the networks running on Lucent gear, investors traditionally felt one of the pillars of Lucent's strength was repeat sales of high-margin software upgrades. This number suggests that business isn't as solid as hoped.
  • Cash flow turned red. Lucent showed negative cash flow of $1.1 billion, which is negative enough. But only in selling those $1.1 billion of receivables did Lucent avoid a staggering $2.2 billion of negative cash flow. Cash flow, roughly speaking, measures whether cash is coming in or leaving the business. Lucent says it expects to eliminate $2 billion in inventory and late payments this year to help reverse that trend.
  • Vendor financing is skyrocketing. Lucent's vendor financing commitments are expected to reach $9.1 billion this quarter. Building on the $7.5 billion in loans Lucent has committed to customers, the company says it will take on an additional $1.6 billion commitment to Spain's Telefonica, which is building an Internet-enabled, or third-generation, wireless network in Germany. Interestingly, the financing commitment doubles equipment costs, meaning Lucent is ponying up $800 million for Telefonica's operating costs.

Let's hope they can stay away from the special sauce.

Investors tend to

question the value of a sale when the company doing the selling lends the buyer the purchase price. And the practice looks especially troubling in the Telefonica case, in which the value of the loans significantly exceeds the price of the gear. Lucent says it is picking its borrowers carefully and has been successful in selling the loans to third parties, typically banks or insurance companies. Still, investors worry Lucent may turn more often to the practice to juice up sales.

"Let's hope they can stay away from the special sauce," says one New York-based hedge fund manager, referring to vendor financing. "It's the quick fix for sales." The money manager, who asked not to be identified, is long Lucent.

Lucent also increased its reserves for customer financing by $340 million in the fiscal first quarter, on concern that more of its customers won't be able to make payments. The company stressed that it will now avoid doing business with potential deadbeats. But observers question whether Lucent can say no to any money at this point.

Not So Bad?

To be sure, some analysts are taking Lucent at its word. Bruce Hyman, a debt analyst with

Standard & Poors

, says the company has shown it can reduce costs to improve performance.

"Those are stretch goals, certainly," says Hyman, "but in my talks with top management, I felt there was a huge degree of dedication to execute this plan." Hyman lowered his credit rating from A to BBB+ last month, when Lucent warned of a substantial shortfall for the fiscal first quarter.

Lucent shares edged up 81 cents, or 4%, to close at $19.62.

Is this a time to buy?

Probably not, says one Wall Street analyst, who asked not to be identified. "This is probably the bottom, but they might muddle along the bottom for quite a while," says the analyst, who has no rating on Lucent. "This is not a company to get into right now as a turnaround prospect."

Still, Lucent's condition doesn't appear to be critical, and many were cautiously optimistic about its prognosis.

"Turnarounds are tough, but Lucent is not terminal," says

Lehman Brothers

senior communications equipment analyst Steven Levy, who has a neutral rating on the company and whose firm hasn't underwritten for Lucent.

Says Levy, using the vernacular of multistep recovery programs, "They way they dig out of this mess is over time and one deal, one account at a time."