UPDATE 3-Alcatel turnaround progress raises investor hopes

Thu Oct 31, 2013 10:10am EDT

* 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 maker Alcatel-Lucent posted higher revenues and a narrower loss in the third quarter helped by double-digit growth in the highly profitable U.S. market as it raced to cut costs to survive.

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

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

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

Combes has also pledged 1 billion euros in asset sales by 2015, 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 business that has struggled to keep pace with larger rivals despite having a strong position in the United States.

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

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

In September, Reuters reported that Nokia was discussing internally whether to approach Alcatel-Lucent about a tie-up or buying its wireless unit, funded by the proceeds it will get from the sale of its handset business to Microsoft Corp

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

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

The margin improvement came from selling higher-margin IP networking 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 1.65 billion euros.

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

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

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

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

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

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

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

Credit Suisse analyst Achal Sultania predicted that progress on cost-cutting as well as the uptick in the business could lead operating margin estimates to be revised upwards by 50 to 75 basis 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 very elusive for Alcatel-Lucent, a by-product of their customer relationships and the high exit costs in the communications equipment sector," Jefferies wrote.

The results follow weak quarters at Ericsson and NSN, which were hit by slower spending by operators finishing superfast mobile buildouts, known as 4G. But investors cheered a bullish year-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.