Alcatel turnaround progress raises investor hopes

Reuters

* Sales in-line at 3.67 bln euros

* Losses narrow as U.S. grows

* Cost cuts help gross margins

* CEO Michel Combes says trying to save Alcatel

* Share price up 18 pct

By Leila Abboud

PARIS, Oct 31 (Reuters) - Telecom equipment makerAlcatel-Lucent posted higher revenues and a narrowerloss in the third quarter helped by double-digit growth in thehighly profitable U.S. market as it raced to cut costs tosurvive.

Investors cheered the progress made by Chief ExecutiveMichel Combes seven months after he took the reins of theloss-making group, sending shares up 18 percent at 1326 GMT assome analysts predicted consensus forecasts would be upgraded.

Combes strategy is to streamline the group to focus on IPnetworking products, which help telecom operators carry mobiledata traffic, and high-speed mobile and fixed broadband, whileslashing the staff by 10,000 to save 1 billion euros by 2015.

He hopes to end six straight quarters of losses and save thegroup, which is on its third CEO and sixth turnaround plan sinceits creation in a 2006 merger.

Combes has also pledged 1 billion euros in asset sales by2015, which were being "actively" worked on now.

And he appeared to hint at being open to a bolder move,namely selling off the company's loss-making wireless businessthat has struggled to keep pace with larger rivals despitehaving a strong position in the United States.

Asked by an analyst whether the wireless business wasstrategic to the whole of Alcatel, Combes replied:

"My commitment to investors is to deliver on the Shift planand create optionality depending on where the market goes longterm," he said, referring to the turnaround plan from June.

In September, Reuters reported that Nokia wasdiscussing internally whether to approach Alcatel-Lucent about atie-up or buying its wireless unit, funded by the proceeds itwill get from the sale of its handset business to Microsoft Corp

Revenue in the third quarter rose 7 percent on a constantcurrency basis and 1.9 percent on a reported basis to reach 3.67billion euros ($5.05 billion).

The group posted a net loss of 200 million euros, and had agross margin of 32.6 percent, up from 27.8 percent a year ago.

The margin improvement came from selling higher-margin IPnetworking routers and broadband products, as well as cost cuts.Revenue from IP products grew by 7 percent to 580 million euros,while North American revenues climbed by 13.6 percent to 1.65billion euros.

Analysts had expected third-quarter revenue of 3.6 billioneuros and a net loss of 139.4 million, according to ThomsonReuters I/B/E/S.

The French-American group said it consumed 218 million eurosof cash in the quarter, taking the cash used so far this year toroughly 1 billion euros. Cash burn has been a perennial problemfor the group, which has a higher cost base than peers.

Alcatel-Lucent's woes stem from intense competition not onlyfrom low-cost Chinese rivals but also from larger vendors likeSweden's Ericsson and Finland's Nokia NSN unit.

The United States, where Alcatel and Ericsson are thedominant players, has been the group's saving grace becauseChinese vendors are essentially barred over security concerns.

Yet as Alcatel-Lucent has struggled, investors have begunhoping for consolidation in the sector.

Combes refused to say if talks had begun with Nokia, sayingonly that he was focused on strengthening Alcatel-Lucent.

Cost cuts are at the centre of Combes' plan, and on Thursdayhe said the company would strip out more fixed cost this yearthan the initial 250-300 million euros initially planned.

Credit Suisse analyst Achal Sultania predicted that progresson cost-cutting as well as the uptick in the business could leadoperating margin estimates to be revised upwards by 50 to 75basis points for 2013 and 2014.

"The market may get more confidence around sustainable 5-6%margins longer term," the analyst wrote.

Analysts from Jefferies expressed more concern.

"Historically, these kinds of cost cuts have been veryelusive for Alcatel-Lucent, a by-product of their customerrelationships and the high exit costs in the communicationsequipment sector," Jefferies wrote.

The results follow weak quarters at Ericsson and NSN, whichwere hit by slower spending by operators finishing superfastmobile buildouts, known as 4G. But investors cheered a bullishyear-end forecast for NSN, sending its shares higher.

Alcatel said it would end the year on a high note with"strong seasonal activity" in the fourth quarter.

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