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UPDATE 2-Alcatel revenues lifted by U.S. as cost cuts start

Leila Abboud
Thursday, 31 Oct 2013 | 4:17 AM ET

* Sales in-line at 3.67 bln euros

* Sixth quarter of net losses

* CEO Michel Combes says trying to save Alcatel

* Won't be drawn in on talk of consolidation

* Share price up 11 pct

PARIS, Oct 31 (Reuters) - Telecom equipment maker Alcatel-Lucent posted higher revenues in the third quarter helped by double-digit growth in the highly profitable U.S. market as it raced to cut costs to end six straight quarters of losses.

Alcatel-Lucent Chief Executive Michel Combes, who took the helm in April, is seeking to streamline the group to focus on high-speed mobile and fixed broadband products, while slashing the staff by 10,000 to save 1 billion euros by 2015.

He hopes to save the group, which is on its third CEO and sixth turnaround plan since its creation in a 2006 merger, and assure it an independent future.

Shares in Alcatel rose 15 percent at the open as investors cheered the progress on cost cuts and resistance in the United States where the overall market was flat.

One Paris-based trader called the results "very good" and said the company's comments that it expected a strong end to the year were also "reassuring".

Revenue in the third quarter rose 7 percent on a constant currency basis and 1.9 percent on a reported basis to reach 3.67 billion euros ($5.05 billion).

The group posted a net loss of 200 million euros, and had a gross margin of 32.6 percent, up from 27.8 percent a year ago.

The margin improvement came from selling higher-margin IP networking routers, which help telecom operators carry mobile data traffic, and fixed broadband products, as well as cost cuts. Revenue from IP products grew by 7 percent to 580 million euros.

Analysts had expected third-quarter revenue of 3.6 billion euros and a net loss of 139.4 million, according to Thomson Reuters I/B/E/S.

Sales in Asia slumped 10 percent in the quarter, while Europe eked out 3 percent growth, the company said on Thursday.

The French-American group said it consumed 218 million euros of cash in the quarter, taking the cash used so far this year to roughly 1 billion euros. Cash burn has been a perennial problem for the group, which has a higher cost base than peers.

Alcatel-Lucent's woes stem from intense competition not only from low-cost Chinese rivals but also from larger vendors like Sweden's Ericsson and Finland's Nokia NSN equipment unit.

The United States, where Alcatel and Ericsson are the dominant players, has been the group's saving grace because Chinese vendors are essentially barred over security concerns.

Yet as Alcatel-Lucent struggles, some investors have begun hoping for consolidation in the sector.

Since Nokia sold its handset business to Microsoft for 5.44 billion euro, it has weighed internally whether to make a bid for all or part of Alcatel-Lucent, sources told Reuters in September.

Combes refused to say if talks had begun with Nokia, saying only that he was focused on strengthening Alcatel-Lucent.

"We will see in the coming years whether consolidation will take place depending on the conditions in the market," he said in a call after results.

"My focus is to implement my plan, which will make us stronger regardless of what happens in the industry long-term."

Cost cuts are at the centre of Combes' plan, and on Thursday he said the company would strip out more fixed cost this year than the initial 250-300 million euros initially planned.

Analysts from Jefferies investment bank said they were "concerned" about Combes ability to generate "truly significant" cost reductions.

"Historically, these kinds of cost cuts have been very elusive for Alcatel-Lucent, a by-product of their customer relationships and the high exit costs in the communications equipment sector," Jefferies wrote.

The results follow weak quarters at Ericsson and NSN, which were hit by slower spending by operators finishing superfast mobile buildouts, known as 4G.

But investors cheered a bullish year-end forecast for NSN, sending its shares higher.

Alcatel too said that its business would end on a high note with "strong seasonal activity" in the fourth quarter.

"We are seeing the first positive signs of our new operating model," said Combes.