Alcatel signs IP deal and pledges higher margins

PARIS, FRANCE: Telecom equipment maker Alcatel-Lucent promised improved margins in 2012 after inking an intellectual property deal expected to generate substantial new revenue.

The Franco-American group, which has struggled since it was formed in a merger in 2006, posted largely in-line fourth-quarter results on Friday marked by lower revenue but strong free cash flow generation.

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Chief Executive Ben Verwaayen - who acknowledged he had not delivered on targets laid out in a three-year turnaround plan - pledged a renewed focus on cost and cash but warned the task could be complicated by telecom operators scaling back network investments amid global economic turmoil.

"Our aim was to be a so-called normal company by the end of 2011, and we didn't make all our targets there, that is fair to say," he told a conference call.

Alcatel-Lucent said it had signed a deal with patent licensing specialist RPX Corp (RPXC.O) that would allow it to generate substantial new revenue from its portfolio of 29,000 patents on everything from fixed and mobile communications to semiconductors and consumer electronics.

Under the deal, RPX will market Alcatel-Lucent's patents to its roughly 50 members, which include companies like Google and Intel. By next summer, RPX will present Alcatel-Lucent with the option to sign licensing deals with the individual companies.

Alcatel-Lucent did not specify how much money it thought it could make from the deals, but Oddo Securities estimated that it could be 1 billion euros in 2012.

Shares in the group jumped 14 percent to 1.70 euros by 1310 GMT, though the stock is still at two-year lows and its market capitalization is a tenth of its pre-merger levels.

"The patent deal is moving the shares today, just as much as the results," said Odon de Laporte, analyst at CA Cheuvreux. "The markets find it reassuring because it will improve the financial situation of the group."

DEALS POSITIVE

Alcatel-Lucent grappled with rapid cash burn last year, a perennial worry in the capital-intensive industry that requires build up of inventories before clients pay their bills.

The cash burn issue, coupled with weaker sales as telecom operators slowed spending in the second half, sparked investor concerns about the group's liquidity.

The patent deal with RPX, as well as a recently closed sale of its Genesys unit for $1.5 billion, would alleviate some of Alcatel's liquidity worries, analysts said.

Alcatel-Lucent CEO Verwaayen admitted there was more work to be done but expressed confidence the company would deliver on the turnaround: "We are moving on, and we are confident that we will make more improvements this year and more progress."

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Verwaayen's task could be made harder by slower network spending by telecom operators this year, especially in Europe where the debt crisis is dragging on.

Market leader Ericsson (ERICb.ST) sounded the alarm at its last results. Even the most optimistic observers expect only 3-4 percent growth in telecom infrastructure spending this year.

Many analysts expect a steep drop in mobile investments after a strong year in 2011 driven by U.S. operators spending to keep up with the smartphone and tablet boom.

CAUTIOUS CUSTOMERS

Alcatel pledged to improve its adjusted operating margin above 2011 levels by growing revenue and cutting costs and said it aimed to reach a net cash position by the end of the year.

Citing limited visibility on telecom operator spending, Verwaayen declined to put a number on his margin target. That is a change from last year, when he began with an aim of a 5 percent margin and scaled it back to 4 percent in November, prompting a sell-off in the shares.

The group, which competes with Sweden's Ericsson and China's Huawei HWT.UL, posted fourth-quarter revenue of 4.15 billion euros, down 13 percent, and full-year revenue of 15.33 billion.

Quarterly adjusted operating profit fell 20 percent to 316 million euros, with a margin of 7.4 percent.

Net profit for the year was 1.1 billion euros ($1.46 billion), half of it from a tax benefit.

In November, Alcatel-Lucent was forced to abandon its aim to be cash flow positive in 2011. It finished the year with negative free cash flow of 458 million euros and a net debt position of 40 million.

"The shares are performing strongly as the initial focus is likely to be on the cash flow, balance sheet improvement," UBS analysts wrote in a note. "However, we believe the operational environment remains challenging."

Alcatel-Lucent confirmed an earlier goal that the group planned to cut costs by 500 million euros this year. Unions have said the company plans to cut 1,800 jobs, and the company said some staff would be relocated or repositioned.

Alcatel-Lucent's board has recommended no dividend should be paid on last year's results.