Alcatel-Lucent's recent warning of lower-than-expected first-quarter earnings may have been music to the ears of rivals hoping the mega-vendor will be distracted by merger integration in its first year. Its first two quarters as a combined company have both been disappointing.

“Competitors are picking away at Alcatel-Lucent's market share as the company struggles to rationalize its product portfolio, streamline operations [and cut] 12,500 people,” said Mark Sue, analyst for RBC Capital Markets, in a note following the warning.

According to Simon Leopold, analyst for Morgan Keegan, some of Alcatel-Lucent's customers may have suspended purchases in recent months because of insecurity over which redundant products the vendor would excise post-merger. Alcatel-Lucent has been working hard to reassure its clients on that front, while its rivals do the opposite.

“Competitors have exploited the opportunity by fanning the flames of fear, uncertainty and doubt, pitching carriers with the suggestion that the current Alcatel-Lucent products will be discontinued,” Leopold wrote in late March.

Alcatel-Lucent, however, promised in April that it had finalized its technology decisions and informed customers of its portfolio road map. And in its first full quarter as a combined entity, the company made 15% of the 12,500 staff cuts it targeted for its first three years.

The company blamed its first-quarter slip on the wireless and core markets. Alcatel's share of 2G wireless gear in emerging markets is under pressure, and AT&T's Cingular division is reining in spending on Lucent's wireless gear. But the merged vendor also won a $6 billion deal with Verizon Wireless in the first quarter and expects the 3G UMTS business acquired from Nortel Networks to contribute more over time. Meanwhile, the company dominates the global optical and access markets. Later this year, it will begin eating into Tellabs' share of Verizon Communications' fiber-to-the-premises rollout. So competitors may have a limited window in which to exploit any post-merger lethargy.

“Eventually, the situation will stabilize at Alcatel-Lucent,” Sue said, “but we think we're in for several more bumpy quarters.”

ONE ANALYST'S ESTIMATE OF ALCATEL-LUCENT'S OUTLOOK