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Alcatel halves net loss as turnaround strategy kicks in

The logo of the telecom equipment maker Alcatel-Lucent is seen on the company site building in Rennes, western France, October 15, 2013. REU
The logo of the telecom equipment maker Alcatel-Lucent is seen on the company site building in Rennes, western France, October 15, 2013. REU

By Leila Abboud and Gwénaëlle Barzic

PARIS (Reuters) - Alcatel-Lucent almost halved its net loss for 2013 as cost-cutting, a tweaked product offering and asset sales under Chief Executive Michel Combes began to take effect.

The telecoms equipment maker, which competes with Sweden's Ericsson, China's Huawei and Nokia's NSN unit, said its gross margin was 34 percent and operating profit 307 million euros - both better than expected.

The group posted its first quarterly profit since March 2012 and in the fourth quarter operating margins went to 7.8 percent from 2.8 percent in the last quarter of 2012.

Alcatel shares rose 9.5 percent as investors bought into the operational momentum that Combes has built two quarters into his 'Shift' plan, which includes 1 billion euros in asset sales, 1 billion in cost cuts, and 10,000 layoffs through 2015.

Some of the spike was due to short sellers covering their positions, traders said. According to Markit data, 9 percent of shares were out on loan to investors betting against the group.

"The plan is already deeply transforming the company and comforting our view that we have made the right strategic choices," Combes said on a conference call on Thursday.

He also confirmed his target of making the group cash flow positive and sustainably profitable by 2015. But the results showed there was still some way to go on that front.

Fourth-quarter revenue at 3.93 billion euros ($5.32 billion) missed analysts' expectations by 5.5 percent. Its net loss was 1.3 billion euros, compared with the 2012 loss of 2 billion, caused largely by writedowns on the mobile business and restructuring costs from layoffs.

It also again used more cash than it made, taking free cash flow to a negative 636 million euros. It has not been free cash flow positive since the merger that created it in 2006.

Alcatel-Lucent's woes stem from intense competition not only from low-cost Huawei, but also from Nokia's NSN, which has signaled it will compete aggressively for contracts this year as it emerges from a painful restructuring and needs to grow its top-line.

FORTRESS U.S.

In mobile network gear, Alcatel-Lucent struggles as the fourth largest vendor and relies on its stronghold in the high-margin U.S. market, while in broadband and IP it is a leader and is even increasing market share in some product areas.

The fortress of its North America business, which grew almost 14 percent last year, is protected by Chinese vendors being largely excluded due national security concerns.

Sales in Europe, its second-biggest region, shrunk 3 percent last year, while Asia saw a slight rise.

Combes' strategy is to streamline the group to focus on IP networking products, which help telecom operators carry mobile data traffic, and on high-speed mobile and fixed broadband.

He has also shored up the group's finances with a capital increase and refinancing debt.

He has sold two businesses units in recent months worth some 350 million euros. The latest deal, announced on Thursday, will see Alcatel sell 85 percent of its enterprise business, which sells communications products and services to corporations, to investment fund China Huaxin.

The transaction, which has yet to be finalized, prices the unit at 268 million euros on an enterprise value basis. China Huaxin, which is already partnered with Alcatel in its Chinese joint venture, will take on all its employees and contracts.

Alcatel-Lucent has a market capitalization of 9.2 billion euros.

(Additional reporting by Blaise Robinson; Editing by Louise Ireland)

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