How the Once-Luminous Lucent Got Into Double Trouble

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Sure, SEC, kick 'em while they're down.

For most of 2000, once-high-flying telecom equipment maker Lucent Technologies was the poster child for Internet depression. A high-tech AT&T spinoff that, as CEO Henry Schacht went around saying this winter, tried too hard to be a high-speed, high-growth dot-com, Lucent has gone from highly regarded — mentioned in the same bellwether breath as Cisco, Intel and Microsoft — to highly suspect.

In January 2000, with its stock near $80 a share, Lucent delivered its first self-inflicted blow: First-quarter earnings would fall short of Wall Street expectations. Another warning came in July about the fourth quarter. In October, the company fired its CEO and warned about its next report, and in December new CEO Schacht announced that Lucent would have to go back and cut revenues by $679 million for the fiscal year that had ended three months before. These days the stock is somewhere in the high teens.

And now, the SEC is investigating that very fiasco. The specifics are mostly dry accounting stuff, and are being held pretty close to the agency's vest at this point — but the Wall Street Journal reports that "commission staff are investigating Lucent's procedures for booking sales, in particular its use of 'nonrecurring credits,' or one-time discounts, given to customers, as well as Lucent's accounting treatment of software-licensing agreements."

Which was one of the things that got Lucent into trouble in the first place. Eager to keep impressing Wall Street with steroidal growth numbers and counting all manner of nascent start-ups and emerging companies among its potential customers, Lucent apparently developed a habit over the years of goosing up its sales with so-called vendor-financing arrangements, in which Lucent would lend customers the money to buy equipment and sometimes install it too.

Then there were the discounts — offering some of its biggest customers deep discounts to make purchases they might otherwise have postponed until a later quarter. This would help Lucent boost its revenue numbers in the quarter when they needed a boost; problem was, Lucent's business continue to sag, at which the discounts came back to haunt them.

Which all led in part to December's $679 million "revenue recognition" mea culpa, in which Lucent essentially had to face the music for on-credit purchases that fell through. It was the latest in the string of earnings embarrassments for the company (though not the last — in January, Lucent reported that first-quarter sales were down 28 percent and announced a $1.6 billion restructuring charge).

Lucent spokeswoman Kathleen Fitzgerald told the Journal it was "voluntarily and completely cooperating with the SEC" since it was first contacted in November, and has shared not only all of its findings on revenue restatements with the commission but also the results of an external audit. Company lawyers have also been regular visitors to SEC headquarters in Washington.

Schacht, while he looks for a turnaround-minded CEO to replace him, says the company will go slower when it comes to front-loading its books. He's also warned investors to expect the next few earnings periods to be on the glum side, declaring 2001 a rebuilding year.

It certainly would be difficult for it to be any worse than 2000.