Alcatel-Lucent’s restructuring not a full remedy, say analysts

Analysts and investors seemed to approve of the new restructuring plans Alcatel-Lucent announced today, but the moves did little to assuage deeper doubts surrounding the company.

In the wake of a recent downward revision of its annual financial expectations, the merged megavendor today announced the addition of 4000 more job cuts to the 12,500 already targeted, anticipating an added savings of 2.1 billion euros by 2009. It also reorganized the top management roster into a team of seven, replacing the current chief financial officer.

“While [the restructuring moves] are a step in the right direction, they do not answer the key strategic question,” UBS Investment Research analysts wrote today. “We are still concerned over the wireless segment, which we believe is not well positioned in an industry likely to remain very competitive.”

Having blamed its outlook for flat revenue this year primarily on a dip in spending among North American wireless carriers, Alcatel-Lucent is working to improve the economics of that segment of its business. The company plans to narrow the various wireless platforms of its two pre-merger counterparts--as well as the wireless business it acquired from Nortel Networks--into a single converged wireless platform by the third quarter of next year, the company said today.

Despite an up tic in sales and income for its GSM business, Alcatel-Lucent’s overall third-quarter wireless revenue dropped 24% from a year earlier, and carrier sales were down 15%, while wireline and enterprise revenue each grew 5%, and services revenue remained flat. Overall, results were slightly better than the company warned in September; revenue grew 1% sequentially.

The company’s gross margins improved slightly from 32% to 34%, but CEO Pat Russo acknowledged that competitive pricing in the industry could pose a threat to its goal of raising those margins to the high 30s by 2010. “Alcatel-Lucent still needs to choose between top-line growth and margins,” RBC Capital Markets analyst Mark Sue wrote in a note today. “We're not assuming competition subsides much in the next several quarters.”

To Simon Leopold, an analyst with Morgan Keegan, today’s restructuring announcements were a sign that, after a series of setbacks earlier this year, “The company could be getting back on track.” Its expectations for sequential revenue gains in the fourth quarter are “encouraging,” he said, but added, “The restructuring improvement remains a slow process.”

“It may take another few years for the combined entity to emerge with a stable and sustainable earnings growth outlook,” Sue wrote today. Though “mildly encouraged” by the company’s new restructuring plans, he reiterated sentiments he’d been making for months: “It's going to be a bumpy road.”