Nokia on Thursday posted a surprise rise in second-quarter profits, helped by high-margin software sales and fewer low-priced contracts. The Finnish network gear maker is set to buy the Franco-American telecom equipment maker Alcatel-Lucent which posted second-quarter sales slightly lower than expectations.
Nokia will buy Alcatel-Lucent for €15.6bn in a deal set to close by mid-2016. The latter improved its margins to deliver better-than-expected operating profit, thanks to cost cuts, and generated more cash than it consumed in the quarter for the first time in a second quarter since 2006.
Getting to free cash flow positive remains the key goal of Alcatel-Lucent in the turnaround plan launched by chief executive Michel Combes in April 2013. He will step aside on September 1 to be replaced by chairman Philippe Camus until the Nokia deal closes.
"We are fully mobilised to achieving the free cash flow goal and have created an organisation that is much more resilient than in the past," said chief financial officer Jean Raby on a conference call. "The Nokia deal is on track to be completed in the early part of the timeline we gave, if not earlier."
Alcatel's second-quarter revenue rose 5% to €3.45bn euros helped by double-digit growth in so-called IP products that help telecom operators handle heavy video data traffic and direct Internet. Adjusted operating profit rose 28% to €175mn for a better-than-expected margin of 5.1%. The company posted a net loss of €54mn, narrower than the €298mn loss of a year earlier.
Analysts had been expecting second-quarter sales of €3.47bn and net income of €52.4mn, according to Thomson Reuters I/B/E/S data. The gross margin was 34.8%, compared with expectations of 33.1%.
Announced in mid-April, Nokia's acquisition of Alcatel-Lucent aims to position the company to better compete with market leader Ericsson of Sweden and low-cost Chinese powerhouse Huawei by forging a strong number two in mobile with a more complete product line.
The companies have secured antitrust approvals in Europe Union, Brazil, Russia and the United States, but are still waiting on a decision from the Chinese authorities.
Alcatel-Lucent's Raby said the group still aimed to sell a majority stake in its undersea cable unit, which analysts value at up to $1bn, before the Nokia deal closed.
Since the deal was announced in mid-April, Alcatel's shares have dropped 27% while Nokia's are down 20%, reflecting investors' concerns about weakness in the telecom gear market overall and the marriage. Ericsson's are down 20% in the same period.