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Alcatel-Lucent (ALU) shares are stumbling today after announcing fourth quarter results that fell well short of Street expectations.

“In the past few months,” the company said in announcing its results, the merger of Alcatel and Lucent and some other related moves “created short-term uncertainty for our customers and for our people as we worked to develop the combined company’s product portfolio and new organization structure. This uncertainty together with the work required to close the merger significantly impacted the business. In addition, the last quarter of the year proved to be challenging from a market perspective, driven by a shift in spending from some of our large North American customers and heightened competition in the global wireless market. Overall, the 2006 adjusted pro-forma financial results of the combined company were impacted by the weak performance in the fourth quarter resulting in cumulative revenues for full year 2006 at a similar level to full year 2005 revenues. ”

Merrill Lynch’s Sandeep Malhotra today dropped his rating on the company to Neutral from Buy, asserting that the results were “shocking,” missing expectations by 10% at the revenue line at 35% at the operating profit level.

“We estimate that CDMA accounted for 61% of the revenue miss and 56% of the profit miss,” Malhotra writes. “After a great September quarter, we think Lucent’s CDMA business cratered in the December quarter. We also believe that Alcatel’s GSM and 3G business suffered from customer spend delays due to 3G product road map uncertainty and margin pressures resulting from a very competitive GSM market. 32% of the revenue and 27% of the profit shortfall came from Alcatel’s GSM mobile business.”

Malhotra adds that he thinks “Alcatel’s gains in next-generation DSL and fiber access at major U.S. incumbents has come in part at the expense of Lucent. The delay in the AT&T/BellSouth merger also may have caused delays in spending. This could also end up being a systemic issue that could cause ongoing revenue leakage.”

The bottom line, Malhotra says, is that the company’s wireless business has troubles. “Our Buy case on Alcatel-Lucent was based on industry consolidation and achievement of cost cuts through synergies, leadership in wireline, recovery in wireless through significant share gains in 3G (from the purchase of Lucent as well as Nortel’s 3G radio assets), and gradual declines in CDMA. While we remain firm believers in margin expansion through synergy realization and also think that the company’s wireline position will strengthen, we are of the view that there is too much uncertainty in the company’s wireless business – both in CDMA and GSM/3G. We need more evidence to be convinced that Alcatel-Lucent’s position in GSM/3G will not deteriorate, but will instead improve materially from current levels.”

Alcatel-Lucent shares are down $1.26 to $12.93.

Source: Alcatel-Lucent's Big Miss Leaves Merrill 'Shocked'