Alcatel-Lucent Loss Narrows as Cost Cuts Boost Margins

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Alcatel-Lucent SA, France’s largest network-equipment vendor, reported a narrower third-quarter loss as Chief Executive Officer Michel Combes continued to cut costs to offset falling sales. The stock rose the most in a year.

The loss excluding some items narrowed to 9 million euros ($11.3 million) from 186 million euros a year earlier, the Paris-based company said today. The gross margin, a measure of profitability, widened to 34 percent, beating the 32 percent analysts predicted on average.

Combes has sought to focus on more profitable contracts while cutting jobs and selling assets to revive Alcatel-Lucent after years of losses. Persuading customers to spend more on network gear has proven more difficult, as carriers cope with falling earnings in Europe and pause in the U.S. after building higher-speed infrastructure.

“We improved profitability in most of our business lines,” Chief Financial Officer Jean Raby said on a conference call. “It’s thanks to a better mix, better products and a focus on profitable contracts.”

‘Sustainable Profitability’

The shares gained 16 percent to close at 2.37 euros in Paris, giving the company a market value of 6.7 billion euros. They have more than doubled since Combes became CEO on April 1 last year.

Alcatel-Lucent is no longer a cost cutting story, Combes said in an interview in New York today.

“The ship was sinking, now the ship has stabilized,” he said.

Narrowing Alcatel’s business focus to growth areas, selling assets and reducing costs was part of the first stage of the turnaround, Combes said. The next phase of what he calls “the shift plan” will lead to cash generation in 2015.

“Beyond 2015, I’m confident the shift plan will put Alcatel back in sustainable profitability,” he said.

Sales fell 5.9 percent to 3.25 billion euros, compared with the 3.34 billion euros analysts predicted. Strong growth in the Asia-Pacific region -- an increase of 23 percent to 721 million euros -- wasn’t enough to offset a 14 percent drop in North America to 1.36 billion euros.

U.S. Slump

“There was a decrease in the U.S. notably after very strong activity in the wireless area in the previous quarter,” Raby said. “We expect the U.S. market to remain a robust and important market for us in the future.”

The company competes with Sweden’s Ericsson AB and Finland’s Nokia Oyj, as well as China’s Huawei Technologies Co. Ericsson, the biggest maker of wireless networks, last week reported a drop in third-quarter profit as growth came largely from contracts with Chinese wireless carriers -- typically lower-margin deals that weigh on earnings growth.

Alcatel-Lucent said it has now reached savings of 645 million euros, two-thirds of what it targets with its cost-reduction effort. Its adjusted operating margin widened to 5.2 percent from 3.2 percent. The gross margin expanded from 31.9 percent a year earlier.

“It’s a reassuring third quarter,” said Eric Beaudet, an analyst at Natixis SA. “There’s a slight miss on sales, but the operating margin is better than expected.”

The company confirmed its goal of generating positive free cash flow in 2015, the same year it plans to sell part of its submarine-cable unit in an initial public offering.