Fast buildout of mobile networks in the United States lifted Alcatel-Lucent's first quarter sales as the CEO pledged to deliver on a long-promised turnaround of the struggling telecom gear maker.

The Franco-American company, which competes with market leader Sweden's Ericsson and China's Huawei , reported first-quarter revenues up 15 percent from a year earlier to 3.74 billion euros ($5.23 billion) and confirmed annual goals to reach an operating margin of 5 percent or more.

The momentum is clearly continuing, said Chief Executive Ben Verwaayen in a conference call. All businesses contributed to growth, and the Americas were especially strong.

Verwaayen also confirmed the group's annual goals to grow faster than the overall market, which he said would grow around 5 percent this year.

Although the results were in line with analysts' forecasts shares in Alcatel dropped 4.1 percent to 4.11 euros by 0845 GMT as some analysts voiced concerns that the US strength would start to taper off and that Japan-related supply constraints could crimp sales later in the year.

One Paris-based trader also said the share drop could be explained by some investors taking profits after the shares enjoyed a run up 100 percent since January.

I wouldn't get too optimistic about all this, said Thomas Langer, an analyst at WestLB, who has a sell rating on the shares.

The market is impressed by the top-line growth at Alcatel, and the management has had a certain success in managing operating costs, he said. But for us cash is the ultimate benchmark, and Alcatel-Lucent has not shown it can generate cash on an ongoing basis.

Alcatel-Lucent had negative free cash flow of 213 million, compared to negative free cash flow of 429 million euros in the same period last year.

Chief Financial Officer Paul Tufano said on Friday that the group was very committed to its positive free cash flow goal for 2011 and that the first quarter was a positive indication we are going to do it.

Verwaayen took over at Alcatel-Lucent in September 2008 after a value-destroying merger and has focused on higher-margin products in optics and IP technologies in order to slowly improve gross margins.

They reached 36.2 percent this quarter, but Alcatel-Lucent still struggles to generate enough cash to cover costs.


Verwaayen's turnaround efforts have been boosted by strong sales in North America where AT&T and Verizon have been spending heavily to upgrade networks to be able to offer faster download speeds to smartphone customers.

Revenues in North America were up 40 percent from a year earlier to 1.56 billion euros. Alcatel-Lucent earns about one third of its revenues in the region.

The U.S. market also differs in one crucial way: it is effectively closed to low-cost Chinese vendors like Huawei and ZTE Corp <000063.SZ> who have been kept out of major operators' networks over security concerns. That means that Alcatel-Lucent and Ericsson basically split the U.S. pie between them, and can maintain higher prices and margins.

By contrast in Europe, where Chinese vendors have made major inroads, Alcatel-Lucent is under pressure. In the first quarter sales in Europe slipped 1.8 percent to 1.12 billion euros.

Many operators in Europe are undertaking network modernization projects to swap out decade-old wireless equipment, which puts contracts into play and favors Chinese challengers willing to cut price to expand in the market.

Pierre Ferragu, analyst at Sanford Bernstein, says Europe will weigh on Alcatel-Lucent's margins this year, as it tries to protect its market share from challengers.

(Reporting by Leila Abboud and Marie Mawad; Editing by Sophie Walker)