Wall Street cheered

Lucent

(LU)

Tuesday for safely clearing the lowest possible bar, remaining "in the game."

After nearly 15 months of a spectacular free fall, the communications equipment maker gave investors a selective glimpse at its turnaround progress Tuesday. The view was just enough to convince Wall Street that there might be some upside to the telecom gearmaker's investment picture.

"Absence of disaster is a new metric for evaluating companies in this sector," says Glenn Reynolds, a debt analyst with

CreditSights

, a New York credit-research shop.

As one of the nation's most widely owned stocks, Lucent has made its many shareholders all too aware of its woes over the last year and change. Lucent shares, which hit an all-time low of $5.50 in recent weeks on worries the company would default on its credit lifeline, rose $1.05 Tuesday to $10.25, a far cry from the $67 range they enjoyed as recently as last summer.

Stand and Deliver

For its fiscal second quarter, Lucent posted a walloping $3.7 billion loss, including a $2.7 billion restructuring charge. The company booked $5.9 billion in sales, topping estimates by a billion dollars -- not bad in a spending-averse era. As company officials eagerly and repeatedly pointed out, the revenue figure represented a slight sequential improvement over the prior quarter's $5.8 billion, though it was far short of the year-ago $7.2 billion. Still, the sequential rise is significant because Lucent promised that much to the Street, and delivered, something it hasn't done much of over the last year or so.

On that score,

Lehman Brothers

analyst Steven Levy was especially impressed, though in a note to clients Tuesday morning Levy said he found Lucent's financial report to be a mixed bag, filled with confusing numbers and unanswered questions. And like so many of its peers, Lucent declined to provide forecasts for sales and earnings in coming periods, saying customer ordering trends are proving difficult to get a handle on.

On a conference call Tuesday, Lucent CFO Debby Hopkins and Chairman and CEO Henry Schacht confounded analysts by declining to reveal even the most basic information, such as the number of large customers and which of Lucent's networking products drove growth. These are typically routine disclosures on earnings calls that allow investors to puzzle together the quality of the business.

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"It's pretty clear that they still have the cloaking device on," says CreditSight's Reynolds. "Obviously, it's their right not to answer questions," the analyst says, but "they have acute problems and they're providing cute explanations."

Vending Machine

Troubling details did emerge nonetheless. Vendor financing continued to haunt investors: While Lucent managed to reduce its total financing commitments to $6.9 billion from $7.5 billion last quarter, it saw an increase of $200 million in loans drawn. Investors take a dim view of the practice of

lending buyers the money to purchase gear, essentially financing the seller's own business. These worries have been heightened by the increasing number of failures across the telecom business.

Winstar

, the failed telco that Lucent committed $2 billion in financing to,

underscores the risk of suppliers getting into the lending business. Lehman's Levy estimates Lucent reserved $500 million for nonpayments from Winstar last quarter. Lucent can be considered lucky to walk away from Winstar's collapse for $500 million, say observers, given the size of the potential commitment.

Also in the troubling category, Lucent's gross margins dipped to an astonishing 17.5% last quarter. Company officials declined to project when margins might start to improve and when investors could expect to see the 40% to 50% levels typical of the networking business.

Paper-thin gross margins suggest any of a number of business practices, including carrying massive inventory (Lucent is sitting on $6 billion worth) and agreeing to deep price cuts to win sales.

Lucent said sales to small telcos dropped to $200 million from $700 million in the prior quarter, a good sign as the company seeks to distance itself from a failure-plagued sector whose constituents are seen as presenting a significant level of risk. Lucent emphasized that this was good news, as its strategy is to sell to the established phone and Internet service companies.

Chairman Schacht said he was in the middle of a customer tour and found the reception encouraging. During his visits, he said, customers told him it was "good to have you back in the game."

Schacht said the seven-part restructuring is on course, and though he did not provide any sales forecast, he did raise the bar somewhat modestly: "We will be able to moderately increase our sales to show progress on the top line."

Some investors are keeping their 10-foot-pole approach to Lucent, however. "They scare me," says one West Coast money manager with no position in Lucent. "No visibility, tough to hold on to talent -- I would stay away."

Oother investors saw the absence of disaster as a fine sign that Lucent could grow again.

"Assuming they can stem their operational losses, and they can sell their fiber cable business, they are in a good position," says a New York buyside analyst who is long Lucent. "There is hair on this, but it's cheap and there's no reason the stock can't be a double."

As CreditSight's Reynolds puts it: "The company comes out of turnaround hospital walking upright, but with a substantial limp."