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Alcatel posts strong second-quarter, signs Qualcomm partnership

Visitors walk at the Alcatel-Lucent booth at the Mobile World Congress in Barcelona February 28, 2012. REUTERS/Albert Gea
Visitors walk at the Alcatel-Lucent booth at the Mobile World Congress in Barcelona February 28, 2012. REUTERS/Albert Gea

By Leila Abboud

PARIS (Reuters) - Struggling telecom equipment maker Alcatel-Lucent surfed on strong growth in its key U.S. market to beat analysts' estimates and said mobile chip maker Qualcomm would buy a minority stake as part of a research partnership.

In the first full quarter under a new Chief Executive Michel Combes, the smaller competitor to Sweden's Ericsson and China's Huawei posted a quarterly sales rise of 1.9 percent to 3.61 billion euros ($4.78 billion).

Demand for so-called IP products, which help direct data traffic inside telecom networks, grew sharply and pushed up profits, supporting Combes' decision to put them at the center of his strategy to deliver a rebound that has eluded his successors.

But recovery at Alcatel-Lucent, which has lost more than $10 billion since it was created through a 2006 merger, will depend in part on whether telecom operators increase overall spending in the coming years to build superfast mobile broadband or if they trim budgets elsewhere to compensate.

Alcatel-Lucent will have to duke it out with its bigger competitors, including Nokia-Siemens Networks and Ericsson, for contract wins.

Adjusted operating profit was 46 million euros or 1.3 percent of revenues. Analysts had predicted losses.

Shares in Alcatel-Lucent were up 8.8 percent at 0748 GMT(3.48 a.m. ET)

Combes said he would seek three to five partnerships like the Qualcomm deal in a bid to increase Alcatel's R&D firepower. The U.S. chip maker will take a less than 5 percent stake, he said, and the pact is worth some 100 million euros in research funding.

"Other discussions are underway... we hope to make announcements on in the coming quarters," said Combes.

Despite investors' euphoria, the group's second-quarter results were marked by a net loss of 871 million euros caused by a writedown of its sub-scale wireless business.

And Alcatel-Lucent consumed more cash - 248 million euros - in its operations than it generated, a perennial problem for the group.

Alexandre Peterc, analyst at Exane BNP Paribas, said the quarterly results could lead to upgrades to consensus but cautioned that investors should avoid the risky stock.

"Alcatel shares remain extremely risky and volatile," said Peterc in a note. "Though Q2 is good, beating consensus, cash is still worsening faster than anticipated."

In June, Combes pledged to focus the group on high-growth products in IP networking and high-mobile and fixed broadband, while maximizing profits out of older products.

One billion euros of unspecified asset sales and a billion of cost cuts are also slated through 2015.

The deal with Qualcomm, which will be worth roughly 100 million euros in research spending, is to develop miniature base stations known as small cells.

Telecom operators are increasingly layering these tiny base stations on to their networks to boost wireless coverage over a range of 10 to 200 meters.

Operators like AT&T and Vodafone are deploying small cells to ease pressure on networks groaning with mobile data traffic from customers accessing the Internet via smartphones and tablets.

Telecoms consultant Informa predicted the deployment of public small cells would generate 2016 revenues of $16.2 billion ($1 = 0.7545 euros)

(Additional reporting by Cyril Altmeyer; Editing by Christian Plumb and David Cowell)

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