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Strong Lucent Q4 results lift Alcatel spirits

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CIOL Bureau
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By Astrid Wendlandt and Sinead Carew

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PARIS/NEW YORK: A forecast-beating fourth-quarter by U.S. telecoms equipment maker Lucent offset slightly disappointing third-quarter sales from French merger partner Alcatel, boosting the pair's shares.

Alcatel posted a modest 1.4 percent rise in third-quarter sales to 3.33 billion euros ($4.18 billion) on Tuesday - below expectations of 3.46 billion euros in a Reuters poll, as weak wireless activities undermined solid fixed network sales.

However, the Paris-based group's earnings before interest and tax (EBIT) of 258 million euros ($323.7 million), down 7.2 percent year-on-year, was largely in line with forecasts.

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Alcatel shares rose more than 7 percent as merger partner Lucent reported better-than-expected fourth-quarter figures.

Lucent's net profit for the quarter was $371 million, or 7 cents per diluted share including a 1 cent tax windfall -- against analysts' expectations of 4 cents per share.

Unlike Alcatel, Lucent did particularly well in wireless networks, thanks to software upgrades to faster mobile phone networks in North America, known as CDMA EV/DO Rev A.

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"The good news comes from Lucent which is why (Alcatel) shares are up," said analyst Richard Windsor at Nomura.

Alcatel shares rose 7.2 percent to 10.29 euros, while Lucent shares were up 7.3 percent at $2.51 at 1638 GMT. The European DJ technology stocks index slipped 0.2 percent, and the Nasdaq index was off 0.6 percent.

Alcatel's third-quarter net profit also undershot forecasts at 155 million euros, compared with expectations of 171.1 million.

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Neither Lucent nor Alcatel gave an earnings forecast, but Alcatel Chief Operating Office Mike Quigley said he did not expect competitive pressure for mobile networks to ease in the next few quarters, as most emerging markets had started the operation of their mobile networks, slowing the pace.

"The mobile market has been slowing somewhat, we think it (market growth) is probably around again mid-single digits this year in 2006," Quigley said in a conference call.

FIXED LINE STRONG

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Alcatel's all-share acquisition of Lucent is still awaiting approval by the U.S. Committee on Foreign Investment, which Alcatel said on Tuesday it expected to receive in November.

The combination will create one of the world's biggest suppliers of network hardware and software for mobile and high-speed Internet communications with $25 billion in annual revenues, competing for the top spot with Cisco.

The bulk of Alcatel's profits came from its fixed telecoms unit which totalled 151 million euros during the period. Sales from Internet Protocol routing products doubled in the third quarter, as telecoms operators around the world upgrade their networks for television and video-on-demand services.

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"We don't expect that to stop any time soon, it is being driven largely by video," Quigley said.

Revenues in the mobile sector fell to 994 million euros in the third quarter from 1.092 billion a year ago.

Alcatel expects to acquire a third generation mobile phone network unit from Nortel in early December, Chairman and Chief Executive Serge Tchuruk said in a conference call.

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Telecoms operators have been waiting for the deals with Nortel and Lucent to go through before making purchasing decisions, temporarily weakening Alcatel's mobile order book.

"How can they (telecoms operators) buy Alcatel products if the merger with Lucent and especially with Nortel is not done yet -- they cannot do otherwise but to wait," Tchuruk said.

Lucent CEO Pat Russo, chief executive designate for the combined company, said she also saw customers holding off.

"We are seeing some impact as customers are pausing and seeking clarity about our decisions with respect to our product portfolio," she said.

Some analysts said the results showed that the synergies between Lucent and Alcatel were working, as Lucent's earnings supported Alcatel in the third quarter and vice versa in the second quarter. But some remained sceptical.

"Lucent's CDMA was strong, but it was weak in Q2. It says nothing about the health of the CDMA market which is in terminal decline," said analyst Per Lindberg at Dredsner Kleinwort.

(Additional reporting by Lucas van Grinsven in Amsterdam and Ritsuko Ando in New York)

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