Qwest's Upgrade Journey Buoys Lucent

The voice-over-the-Net crowd was whooping and hollering Wednesday after Qwest (Q) rolled out some bold new upgrade plans.

The troubled Denver telco posted a third-quarter profit, helped along by a big gain on the sale of its directories business. But what investors were really excited about was the company's decision to roll out a new generation of phone switches.

Two facts make Wednesday's plunge into voice over Internet protocol, or VoIP, particularly noteworthy. Most important, Qwest's decision will resuscitate Lucent's (LU) so-called softswitch, a highly regarded piece of technology that looked dead in the water when the big gearmaker had its hands full slashing unprofitable businesses. Also intriguing, the move will probably register with some telecom watchers as a protest by Qwest execs champing once more at the regulatory bit.

First things first. The choice of Lucent to head up Qwest's network modernization program is a major win for the misstepping Murray Hill, N.J., gearmaker. Lucent has failed miserably in previous attempts to make a new generation of local phone switches to build on its success with the nearly ubiquitous older model, the so-called 5E. The new equipment that Qwest has agreed to buy is called the 5E-XC and is Lucent's first win on the local switch migration front.

"This is a significant development for Lucent," says Legg Mason analyst Timm Bechter. "This has been a big glaring hole in their product portfolio, and they've done a poor job of upgrading the 5E switches to softswitches."

Rival Nortel (NT), for example, beat Lucent on a huge Sprint (FON) contract, which caused Lucent to largely shelve the softswitch effort as it was wracked by cost cuts.

"Lucent's late to the party, but at least they are now at the party," says Bechter, who has a hold rating on the stock. Legg Mason has no underwriting ties to Lucent.