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updated 2/6/2014 2:25:24 AM ET 2014-02-06T07:25:24

PARIS (Reuters) - Telecoms equipment maker Alcatel-Lucent saw the initial fruits of cost-cutting, a tweaked product offering, and asset sales under new chief executive Michel Combes in 2013, but still posted a large net loss for the year.

The firm, which competes with Sweden's Ericsson, China's Huawei, and Nokia's NSN unit, posted flat fourth-quarter revenue at 3.93 billion euros ($5.32 billion), missing analysts' expectations. But its gross margin of 34 percent and operating profit of 307 million euros were both better than expected.

The net loss for the year narrowed to 1.3 billion euros - from 2 billion in 2012 - and was hurt by recurring problems for Alcatel, namely a writedown on the mobile business and restructuring costs from layoffs. The company also again consumed more cash than it generated, recording negative free cash flow of 636 million euros.

Alexander Peterc, analyst at Exane BNP Paribas, predicted that the shares would rise after the results. "Stock to react moderately positively as the strong beat at gross margin level is offset by the significant revenue miss," he wrote.

The company also announced on Thursday that it was in talks to sell 75 percent of its enterprise business, which sells communications products and services to corporations, to investment fund China Huaxin.

The potential transaction prices the unit at 268 million euros on an enterprise value basis, and the fund, which is already partnered with Alcatel in its Chinese joint venture, will take on all the employees and contracts.

Combes, who took over in April 2013, has pledged 1 billion euros in asset sales and 1 billion euros in cost cuts as part of his turnaround effort through 2015 that will cost 10,000 employees their jobs. Investor optimism about his plan led the stock to quadruple last year.

Alcatel-Lucent's woes stem from intense competition not only from low-cost Chinese rival Huawei Technologies, but also from mobile market leader Sweden's Ericsson ERICb.ST and Finland's Nokia NSN unit.

In mobile network gear, Alcatel-Lucent struggles as the fourth-largest vendor and relies on its stronghold in the high-margin U.S. market, while in broadband and IP products, it is a leader and is even growing market share in some areas.

Combes' strategy is to streamline the group to focus on IP networking products, which help telecom operators carry mobile data traffic, and on high-speed mobile and fixed broadband.

He has also shored up the group's finances by undertaking a capital increase, refinancing debt, and starting an asset sales program worth 1 billion euros.

On Thursday, Combes said the turnaround plan would succeed as promised by 2015, making the group cash flow positive and sustainably profitable. "The plan is already deeply transforming the company and comfort our view that we have made the right strategic choices," he said on a conference call.

The shares closed at 3.03 euros per share on Wednesday, giving the group a market capitalization of 8.45 billion euros. ($1 = 0.7390 euros)

(Reporting by Leila Abboud and Gwenaelle Barzic; Editing by James Regan and Andrew Callus)

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