Alcatel Cost Cuts Help Combes Show Network Maker Can Survive

Alcatel-Lucent SA’s Michel Combes prompted a 19 percent jump in his company’s shares, the biggest increase in five years, by reporting earnings that helped show the French network-equipment maker can scale down to survive.

Seven months into his reorganization efforts, the chief executive officer beat analysts’ estimates for a second straight quarter, posting a narrower-than-expected 200 million-euro ($274 million) loss for the period through September. Combes will have to execute on plans to cut jobs and sell assets in the coming months to further his attempt to turn around the Paris-based company, which has lost more than $10 billion in seven years.

“The recovery story is gaining traction,” said Sebastien Sztabowicz, an analyst at Kepler Cheuvreux France. “Alcatel reported an excellent quarter and the outlook is positive.”

The CEO faces a tough market, with equipment prices under pressure and European phone companies curbing spending. Finnish rival Nokia Solutions and Networks said this week quarterly revenue slid 26 percent. Ericsson AB, the largest maker of wireless networks, missed profit-margin estimates on stiffer competition with Huawei Technologies Co.

To stem losses and conserve cash, Combes, a former Vodafone Group Plc executive who came to Alcatel-Lucent in April, has announced 10,000 job cuts and narrowed research to fewer areas as he evaluates asset sales. Reductions in administrative and general expenses helped save 259 million euros so far this year, putting the company on course to exceed its cost-cutting goal of as much as 300 million euros by year-end.

Stock Soars

Alcatel-Lucent advanced 46 cents to 2.82 euros, the steepest increase since Oct. 30, 2008. On that day, predecessor Ben Verwaayen, less than two months into the job, also reported a smaller-than-expected loss as he prepared a plan to restore profit.

The stock has more than doubled since April this year, and gained 14 percent on July 30 when the company reported second-quarter earnings.

“We expect to see a strong end of the year,” Combes said on an conference call. “We are extremely committed on cost reductions and over-delivering on that front.”

Third-quarter sales climbed 1.9 percent to 3.67 billion euros, topping analysts’ estimates. Operating profit excluding some items was 116 million euros, from a loss of 126 million euros a year earlier. The improvement in profitability came from bigger volumes, selling more high-end products, and especially lower fixed costs, Combes said.

Beyond this quarter, investors will look to assess the company’s ability to maintain lower costs and higher margins in the long run, Jefferies Group LLC analysts led by George C. Notter wrote in a note.

Asset Sales

The quest to make Alcatel-Lucent profitable started when it was created through the 2006 merger of Alcatel SA and Lucent Technologies. CEO changes, job cuts and restructuring have failed for almost seven years.

Combes has laid out plans to reduce costs by 1 billion euros and sell at least another 1 billion euros of assets by 2015, as well as focus on the faster-growing businesses including ultra-high speed Internet.

The company divested “small assets” in mobile advertising and application enablement, though more significant disposals will come in the future, Combes said today.

Nokia Oyj’s sale of its handset business will hand the company cash of 3.79 billion euros for the phone division plus

1.65 billion euros for patents, making the Espoo, Finland-based company a potential buyer of Alcatel-Lucent assets. To catch up to Ericsson and Huawei, Nokia is considering a tie-up with Alcatel-Lucent’s wireless-equipment unit, a person familiar with the plan said last month.

“We have presented a very comprehensive plan, we are focused on that. Whether consolidation might take place later on, I don’t know,” Combes said. “We’ll see in the coming years depending on how the industry evolves, but my focus is to implement my plan which will make us even stronger, whatever happens in the industry in the long term.”

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