February 6, 2015 / 7:46 AM / 5 years ago

UPDATE 3-Alcatel-Lucent eyes turnaround target as costs fall

* Q4 sales in-line, operating profit below consensus

* CEO confirms key cash goal of turnaround plan by year end

* Plan to list undersea cable business (Adds analyst, recasts)

By Leila Abboud and Gwénaëlle Barzic

PARIS, Feb 6 (Reuters) - Telecom equipment maker Alcatel-Lucent pledged to lift profitability again this year through cost cuts after six straight quarters of gross margin improvements and also plans to list its undersea cables business in the second half.

Chief Executive Michel Combes expressed confidence on Friday that the company would deliver on the central pledge of his turnaround plan which started in June 2013 by achieving positive free cash flow by the end of this year.

Fourth-quarter sales fell 6 percent to 3.68 billion euros ($4.2 billion), in line with expectations. Operating profit doubled from a year earlier to reach 284 million euros but was still about 10 percent lower than forecasts as the pace of cost cuts eased from the previous three months.

A slowdown in spending by big U.S. telecoms customers Verizon and AT&T that have largely finished building 4G mobile networks hurt revenues. Internet equipment, a smaller but promising business at the heart of Combes’ strategy, continued to grow.

“These earnings demonstrate clearly that Alcatel-Lucent is back in the game,” Combes said on a conference call.

Shares bounced around in volatile trading on Friday, opening 3.5 percent lower before recovering to trade 2 percent higher at 1002 GMT, indicating mixed sentiment on the results.

Alcatel-Lucent’s shares had risen 6.5 percent this year, giving the group a market capitalisation of 8.9 billion euros.

Exane BNP Paribas analyst Alexander Peterc predicted that analysts would trim forecasts for this year by 3-5 percent, calling the shares “slightly overvalued” after the recent rally.

RESTRUCTURING PLAN

Alcatel-Lucent competes with Sweden’s Ericsson, China’s Huawei and Finland’s Nokia. It has not achieved regular profits since its creation in 2006 because it is smaller in the mobile sector than rivals and faces tough competition from Chinese vendors.

In the current reporting season, Ericsson has also posted fourth-quarter sales below expectations, hit by slower spending by AT&T and Verizon.

However, Nokia has gained ground in the United States thanks to deals with smaller operators Sprint and T-Mobile US that are still building out 4G.

Combes has been trying to remedy Alcatel-Lucent’s shortcomings through an aggressive restructuring plan that has seen the company lay off 10,000 people, sell assets worth about 600 million euros, and carry out a 1 billion euro capital increase to shore up its finances.

He has cut costs on everything from real estate to staff which helped the company increase gross margins to 34.7 percent from 33.4 percent in the same period a year ago.

Trimming the product portfolio, Combes has redirected research and sales efforts into Internet equipment known as core and edge routers, distinguishing it from larger rivals Ericsson and Nokia and taking it into competition with Cisco.

A Paris-based trader agreed that the company had started to deliver on its promises, but remained sceptical. “Overall the results are simply average: the top line is hurt by the U.S., restructuring costs are still high, and the reduction of fixed costs seems to have slowed in the quarter,” said the trader.

The last expected asset sale is the initial public offering of the submarine division, which lays undersea cables that are the backbone of the Internet via a fleet of vessels.

Chief Financial Officer Jean Raby said preparations for the listing were on track and it would take place in the second half of the year, depending on market conditions. Analysts have valued the unit around 600 million euros, and Alcatel-Lucent plans to retain a majority stake. ($1 = 0.8730 euros) (Editing by David Clarke and Keith Weir)

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