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Alcatel-Lucent Posts Loss Due to Merger Costs

French-American telecom equipment group Alcatel-Lucent posted an operating loss, hit by the cost of its $13.4 billion transatlantic merger, and forecast sales would rise 10% in the second quarter from the first.

Alcatel-Lucent, the world's second-largest supplier of telecom equipment, posted a 244 million euro ($330.3 million) operating loss for the three months to March 31 compared with a profit of 246 million euros a year earlier.

The merger between Alcatel of France and Lucent of the United States announced in Spring 2006 and completed in December, has created uncertainty around the combined group's future strategic technological choices.

The group, which issued a sales warning last month, said on Friday it expected full-year sales growth of between 4 and 6% at constant exchange rates, in line with the carrier market. The second-quarter forecast is also at constant exchange rates.

Alcatel-Lucent shares initially dipped after the results, but then climbed as much as 4.5% following a stock upgrade from Credit Suisse and positive comments from some analysts. The shares were up 2.4% at 9.95 euros.

But other analysts were disappointed by the company's forecasts.

"We remain skeptical that this (full-year growth) can be achieved as it requires a very strong recovery in the second half and implies gains in market share," said Richard Windsor, analyst at Nomura in London.

"The task at hand of sorting out the business is so great that we believe there will be no time to focus on gaining market share," he added.

The stock has underperformed the CAC 40 index of blue-chips by 15% since the beginning of the year and the DJ Stoxx Technology Index by 9.5%.

It trades on a prospective price to earnings ratio of about 25 times, which is at a premium to rival Ericsson on about 15 times.

MERGER WRINKLES

A revamp of the company's product portfolio has worried customers and led to delays in long-term investment commitments.

"There is a lot of dialogue that goes on with each customer on the terms of the contract and these will continue," Alcatel-Lucent Chief Executive Patricia Russo told journalists on a conference call.

Alcatel and Lucent, which both underwent a thorough restructuring after the burst of the technology bubble, have issued a number of profit warnings in the past two years as they have struggled to adapt to the market's fast-changing dynamics.

Alcatel-Lucent said on Friday it was on track to realize at least 600 million euros in savings in 2007, part of which it would reinvest in technology and markets.

"While the revenue outlook is encouraging, we believe the company is effectively using its synergies to buy revenue growth through the free cash flow," Deutsche Bank analysts wrote in a note.

The Paris-based group said first-quarter net profit fell to 199 million euros from 306 million euros. This year's figure was boosted by a capital gain of 677 million on the sale of transport, security and space units to electronics group Thales.

In the first quarter, revenues from wireless products fell 15% at constant exchanges rates to 1.20 billion euros but sales from fixed-line products rose 1% to 1.29 billion euros.

"Our industry continues to be tremendously competitive, pricing environment remains challenging and there continues to be some uncertainties in places like China with respect to 3G (third generation) roll-out," Russo said.

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