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TheStreet Open House

Clearing Up My Position on Alcatel-Lucent

NEW YORK ( TheStreet) -- My article on Wednesday, which dissected Alcatel-Lucent's (ALU - Get Report) restructuring plans, was not appreciated by a few of the company's investors.

In describing management's plans to cut costs by one billion euros ($1.3 billion), while also selling an equal amount of assets, I said these strategies only looked good on paper. Investors have emailed suggesting my pessimism is premature.

Just to be clear, I don't disagree that there is merit to what management has decided to do. But I just don't believe that fiscal awareness alone -- absent a clear competitive strategy -- suddenly makes the stock attractive.

In voicing your disagreement, let's not forget the fact that this company has not been able to produce one full-year of positive free-cash-flow since 2006. Granted, there's a new regime. But let's not pretend that rivals Ciena (CIEN) and Acme Packet (APKT) are going to suddenly let off the gas pedal. Management has not addressed the reality that ALU's margins are likely to remain under pressure for the foreseeable future.

Equally important and perhaps more so, ALU has decided to cut costs as soon as the long-awaited carrier spending recovery is finally emerging. Essentially, the company is likely to lose incremental market share when the likes of AT&T (T) and Verizon (VZ) are about to loosen their purse strings to invest capital back into their businesses. It's poor timing.

I am disappointed these decisions are being made just when I felt the company was beginning to turn the corner -- posting decent revenue growth in the recent quarter, while meeting expectations in profitability. In fact, ALU, which has roughly 25% of the edge routing market, has proven that it can gain decent share against more dominant rivals including Cisco (CSCO) and Juniper (JNPR). So there's cause for some optimism.

So why, then, does it now seem appropriate for management to cut spending in areas like research and development? Given Alcatel-Lucent's strong patent portfolio, why not leverage these assets to produce competing products to fight off the likes of Ciena, which has begun to dominate ALU's core optical networking business?

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