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Alcatel-Lucent Must Reach Profitability to Avoid Moody’s Cut

Alcatel-Lucent SA risks having its debt rating cut by Moody’s Investors Service if the French phone network equipment vendor doesn’t return to profitability and stop consuming cash in the second half of the year.

Moody’s today said the Paris-based company’s first-quarter results, including a negative operating margin of 5.5 percent, didn’t relieve concerns about its earnings and cash flow. The ratings agency expects Alcatel will meet the requirements to preserve its B3 rating, the sixth highest non-investment grade, by the end of the year by improving results in coming quarters.

“We continue to expect Alcatel-Lucent to be in a position to meet the requirements for the current rating this year, which, however, requires sequentially improving quarterly results going forward,” Roberto Pozzi, Moody’s vice president and technology analyst, wrote in an e-mailed commentary.

Alcatel-Lucent, which in February named Michel Combes as its new Chief Executive Officer, last week reported a fourth straight quarterly loss as its cash pile shrank by half a billion euros. Combes, in the midst of a strategy review to end losses, has said he will share his conclusions in early summer.

“If the group does not achieve a material turnaround of its profitability and free cash flow in the second half of the year the likelihood of a downgrade is increasing,” Pozzi wrote. The company’s B3 rating is based on the expectation Alcatel will achieve an operating margin of about 5 percent this year and burn less than 500 million euros of cash, he said.

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