Lucent's Strong Fourth-Quarter Results Point Toward Healthier Balance Sheet

But even the chairman says the company has a ways to go.
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Lucent

(LU)

has sated the bulls, beating

earnings expectations and showing surprisingly strong 23% revenue growth in the fiscal fourth quarter.

With more than $10 billion in revenue and more than $1 billion in positive cash flow for the period, Lucent has at least temporarily put to rest

questions about whether its earnings really reflect the strength of its underlying business.

Lucent also improved its balance sheet in most categories -- cutting inventory levels and speeding customer payments. However, the quarter held some potential warning signs, including a small drop in allowance for doubtful accounts and an increase in capitalized software-development costs.

"I do think there's some quality-of-earnings questions," says

Lehman Brothers

analyst Steve Levy, who rates Lucent hold and has been sharply critical of the company's accounting. In addition, the company guided investors to expect slightly lower growth this fiscal year than its 20% clip for fiscal 1999, which ended Sept. 30. (Lehman hasn't done underwriting work for Lucent.)

But even Levy called the results "a very strong quarter, and ahead of expectations." And most pros liked what they saw.

"Their business is clicking," particularly in international markets, says equity analyst Paul Sagawa with

Sanford C. Bernstein

. Sagawa expects Lucent sales to grow more than 19% in fiscal 2000, thanks to continued strength in wireless and optical-fiber network systems. (His firm neither advises deals nor underwrites stock offerings.)

And the stock of the Murray Hill, N.J.-based telecom equipment giant responded Tuesday, rising 3 7/8, or 6.5%, to 63 3/4.

Lucent said early Tuesday that revenue jumped to $10.6 billion in the fiscal fourth quarter, from $8.6 billion a year earlier. Net income, excluding a one-time gain and a one-time loss that roughly canceled each other out, jumped 50% to $972 million, or 31 cents per share, topping the

First Call/Thomson Financial

estimate of 29 cents a share. Lucent had posted operating profit of $647 million, or 21 cents a share, in the year-ago period.

For fiscal 1999, Lucent turned in revenue of $38.3 billion and income of $3.83 billion, or $1.22 a share, up from revenue of $31.8 billion and income of $2.62 billion, or 86 cents a share, in fiscal 1998. (Both earnings figures are net of several one-time charges.)

On a conference call with analysts, Lucent's Chairman and CEO Richard McGinn noted that Lucent's revenue rose 20.4% for the year, exceeding the company's guidance that revenue would rise 19% to 20%.

Looking ahead, McGinn told investors to expect to see revenue grow 17% to 20% in fiscal 2000. As wireless phone use soars and the Internet grows ever more important to business and consumers, "demand has exploded for networking products and services," he said.

Discussing Lucent's balance sheet, which showed signs of strain earlier this year as receivables and inventories mounted, McGinn pointed to several positive trends: Lucent's days' sales outstanding, a measure of how quickly the company collects its bills, have dropped, while it's selling its inventories more quickly. But McGinn said Lucent still needs to improve its balance sheet.

"My view is we're not there," he said. "We're not accepting of this, we're not satisfied with this, even though it has improved."

On that point, Lucent bulls and bears can agree.