Telecom equipment maker Alcatel-Lucent struck an upbeat tone for 2011, keeping an ambitious free cash flow target and reassuring investors on its profitability as it nears the end of its turnaround plan.

The group, which competes with larger rivals Ericsson of Sweden and China's Huawei, saw a strong fourth quarter after a tough 2010 that saw results dragged down by a components shortage.

Alcatel-Lucent has struggled to restore profitability and generate cash since it was formed in a merger in 2006, in a bid to better compete with low-cost Asian challengers.

Verwaayen, a Dutchman who formerly led BT Group before taking over Alcatel-Lucent in September 2008, said the results showed that the group was on track to complete his promised three-year turnaround.

We had the best profits this quarter since the merger and it's a clear indication that we are on our way to becoming a normal company going into 2011, he said in a call with reporters on Thursday.

Alcatel-Lucent set an adjusted operating margin target of 5 percent of 2011 sales, the lower end of the 5-9 percent range that it has previously told investors it would hit in 2011.

Asked whether the 9 percent was now out of reach, Verwaayen said he did not exclude it.

There is clear momentum in the market and for us as a company, said Verwaayen. We feel confident that we will grow faster than our addressable market and aim at a significant increase in profitability.

Alcatel-Lucent said the global market for telecom gear would grow in the high end of the previously predicted 0-5 percent range this year.

Market research firms have forecast 1.6-2.5 percent growth in telecom operators capital spending this year, as a boom in smartphones and tablets overload networks with data.

NORTH AMERICA BOOST

Alcatel-Lucent's full-year revenues were up 5.5 percent to 15.996 billion euro ($21.90 billion), while its adjusted operating income was 288 million euro.

Analysts had expected 2010 revenues would be up 3.8 percent to 15.74 billion euro.

The group had an adjusted operating margin of 1.8 percent in 2010, the lower end of the 1-5 percent range that it had been aiming for.

The fourth quarter was particularly strong with a 22 percent increase in revenues, boosted by strong sales in North America. The group's adjusted operating margin for the fourth quarter was 8.1 percent of sales.

Alcatel-Lucent earns about one third of its revenues in the region through big contracts with AT&T and Verizon.

U.S. operators are investing heavily in fourth-generation wireless rollouts to cope with an explosion in data traffic.

But Alcatel-Lucent struggled to convert higher sales last year in to strong cash flows because of troublesome shortage of electronic components that forced it to stockpile parts.

As a result, it did not deliver on its pledge to break-even on a free cash flow basis this year. Instead, it saw negative free cash flow of 818 million euros, according to Chief Financial Officer Paul Tufano.

We increased our inventory dramatically as we suffered from component shortages, he explained. But we plan to keep reducing inventory this year, and still aim for positive free cash flow in 2011.

Signaling some improvement, free cash flow in the fourth quarter was positive 319 million euros.

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