Fool.com: Lucent Thrown for a Loop (Breakfast News) January 7, 2000

BREAKFAST WITH THE FOOL

Friday, January 7, 2000

"Kindness effects more than severity."
-- Aesop

Lucent Thrown for a Loop

By Richard McCaffery (TMF Gibson)

Shares of telecommunications equipment maker Lucent (NYSE: LU) plunged about 28% yesterday after the company warned of flat fiscal first-quarter revenues and disappointing profits.

Officials at the Murray Hill, New Jersey company, a spin-off from AT&T (NYSE: T) in 1996, said manufacturing capacity problems, lower software revenues, delayed customer purchases, and lower gross margins contributed to the shortfall.

Lucent expects to report earnings in the range of $0.36 to $0.39 per share, compared to $0.48 per share a year ago. Analysts expected earnings of $0.54 per share, according to First Call/Thomson Financial. The company will report its full results on January 20.

Chief Executive Officer Richard McGinn said he's disappointed with the results, though he continues to expect the company's revenues to grow 3% to 5% faster than the total communications networking market. He expects bottom-line growth of 20% to 25%.

He also said the manufacturing capacity and deployment problems, some of which stem from the great demand for the company's products, should be solved by the end of next quarter.

Now, in yesterday's installment I came to the defense of Gateway (NYSE: GTW), the direct sales PC maker whose shares fell in trading Wednesday night after the company missed its quarterly earnings estimate. I argued that the company's intrinsic value -- what it's really worth -- is not diminished because it's going to earn about $0.37 per share in Q4 rather than $0.44.

Today, I'm faulting Lucent for missing estimates. Is it just a matter of which way the wind blows?

No sir. First of all, it's not so much that Lucent missed its numbers; it's the context. The company acknowledged it had execution problems in the quarter, which wasn't the case with Gateway -- even though the box maker needs to make sure it gets enough microprocessors in subsequent quarters.

Lucent, an excellent company by most measures and a market leader, should be forgiven for one tough quarter, except that its problems seem to run deeper. After hitting a high point last July, the company's stock dropped on fears about the strength of its balance sheet. Basically, accounts receivable and inventory, two items every company has to keep close tabs on, were growing too fast. (In general, they shouldn't grow faster than sales.) Mainly as a result of these balance sheet issues, the company reported negative cash from operations for the first nine months of fiscal 1999.

The company bounded back in Q4. Lucent cut its days sales outstanding (DSO), a measure of how long it takes the company to collect accounts receivable, and sold more than $130 million in inventory.

The company's stock price soared as investors cheered the improvements. That said, the levels remained high by Foolish standards. Sales for the year grew 20% while accounts receivable and inventory grew 41% and 54%, respectively.

Investors should wait to see the company's full results on January 20 and take a close look at its balance sheet since it's possible more progress has been made. But yesterday's news, which sent the stock below the price it fell to last summer, probably reflects these earlier fears..

News to Go

Telecommunications company McLeodUSA (Nasdaq: MCLD) is buying Splitrock (Nasdaq: SPLT) for about $2.1 billion in stock and assumed debt in order to bolster its data communications capacities.

Retail giant Wal-Mart (NYSE: WMT) and venture capital firm Accel Partners have teamed up to create Wal-Mart.com Inc., a separate company based in Palo Alto, California whose mission is to grow Wal-Mart's Internet business. Wal-Mart just unveiled its revamped website January 1.

Specialty coffee retailer Starbucks (Nasdaq: SBUX) said same-store sales for company-operated stores jumped 5% for the five-week period ended January 2, and 7% for the 13 weeks ended January 2. Consolidated net revenues for the 13-week period grew 30% to $526 million, compared to $406 million a year ago.

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