May 7, 2015 / 6:31 AM / 4 years ago

UPDATE 2-Alcatel-Lucent defends Nokia deal as weathers U.S. slowdown

* Q1 sales, margins ahead of consensus as profitability improves

* Reports net loss, free cash flow negative 332 mln euros

* Alcatel holds up better than rivals despite U.S. slowdown

* CEO says no need to renegotiate deal terms with Nokia (Adds analyst, shares)

By Leila Abboud and Gwénaëlle Barzic

PARIS, May 7 (Reuters) - Telecom equipment maker Alcatel-Lucent, which is set to be bought by larger rival Nokia, improved profit margins in the first quarter despite a marked sales slowdown in its biggest market, the United States.

Although it reported a net loss, higher software sales, a weak euro, and strong demand for its Internet routing products - which help telecom operators handle heavy broadband traffic from online video - helped the French firm post a better quarter than Nokia and mobile market leader Ericsson.

Both those competitors saw steep drops in their shares after missing profit targets, and Nokia’s misstep prompted some Alcatel shareholders to say the takeover deal terms should be renegotiated.

Alcatel-Lucent Chief Executive Michel Combes dismissed the idea on Thursday, saying there was no need to change the deal since both companies were sticking to their annual targets.

“The strategic rationale of the deal does not depend on the performance of an isolated quarter,” he said.

“There is no reason for any change.”

Alexander Peterc, analyst at Exane BNP Paribas, said the results showed a “significant divergence versus weak peers Nokia and Ericsson”.

Alcatel shares were up 2.8 percent at 3.30 euro at 07:41 GMT, the biggest gainers on the on the French blue-chip CAC 40 index. They had previously fallen nearly 30 percent since the acquisition by Nokia was announced in mid-April, hit by investor scepticism about the merits of the deal.

Nokia’s acquisition of Alcatel-Lucent aims to position the company to better compete with Sweden’s Ericsson as well as low-cost Chinese powerhouse Huawei by forging a strong number two in mobile with a more complete product line.

Alcatel-Lucent shareholders will get 0.55 shares in Nokia for every Alcatel-Lucent share, ending up with 33.5 percent of the enlarged group once the deal closes in mid-2016.

OUTPERFORMANCE

Alcatel-Lucent’s first-quarter revenue rose 9 percent on a comparable basis to 3.24 billion euros ($3.68 billion), ahead of a company-provided consensus of 3.02 billion, while adjusted operating profit nearly doubled to 82 million euros compared with a consensus of 79 million.

The company posted a net loss of 72 million euros - almost flat to the 73 million loss a year before - but some measures of profitability improved because of cost cuts as well as the sale more higher margin products and software.

The gross margin improved to 34.6 percent in the quarter from 32.3 percent a year ago, and the operating margin was 2.5 percent versus 1.1 percent.

“The topline and gross margin beat are impressive, especially in the context of weak North America spending and after the very disappointing results of Nokia and Ericsson on that front,” said Bernstein Research analyst Pierre Ferragu.

Alcatel-Lucent earns almost half its revenue in North America where it supplies mobile and broadband gear to Verizon and AT&T.

The group confirmed its aim to generate positive free cash flow by the end of the year, the central aim of Combes’ turnaround. But it consumed 332 million euro more cash than it generated in the quarter, an improvement of 66 million.

$1 = 0.8800 euros Editing by Andrew Callus and Pravin Char

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