By Leila Abboud and Gwénaëlle Barzic
PARIS (Reuters) - Telecom equipment maker Alcatel-Lucent <ALUA.PA>, which is set to be bought by larger rival Nokia <NOK1V.HE>, improved profit margins in the first quarter despite a marked slowdown in its biggest market, the United States.
Higher software sales and strong demand for its Internet routing products, which help telecom operators handle heavy broadband traffic from online video, helped Alcatel-Lucent post a better quarter than its soon-to-be buyer Nokia <NOK1V.HE> and mobile market leader Ericsson <ERICb.ST>.
Both those competitors saw steep drops in their shares after missing profit targets, and Nokia's misstep prompted some Alcatel shareholders to say the takeover deal terms should be renegotiated.
Chief Executive Michel Combes on Thursday dismissed the idea, saying there was no need to change the deal since both groups were sticking to their annual targets.
"The strategic rationale of the deal does not depend on the performance of an isolated quarter," he said.
"There is no reason for any change."
Nokia's acquisition of Alcatel-Lucent aims to position the company to better compete with Sweden's Ericsson as well as low-cost Chinese powerhouse Huawei [HWT.UL] by forging a strong number two in mobile with a more complete product line.
Alcatel-Lucent shareholders will get 0.55 shares in Nokia for every Alcatel-Lucent share, ending up with 33.5 percent of the enlarged group once the deal closes in mid-2016.
Alcatel-Lucent first-quarter revenue rose 9 percent on a comparable basis to 3.24 billion euros ($3.68 billion), ahead of a company-provided consensus of 3.02 billion, while adjusted operating profit nearly doubled to 82 million euros compared with a consensus of 79 million.
Although Alcatel-Lucent posted a net loss of 72 million euros, some measures of profitability improved because of cost cuts as well as selling more higher margin products and software. The gross margin improved to 34.6 percent in the quarter from 32.3 percent a year ago, and the operating margin was 2.5 percent versus 1.1 percent.
"This was a solid quarter though not an easy one due to the slow spending environment in North America," said Combes.
Alcatel-Lucent earns almost half its revenue in North America where it supplies mobile and broadband gear to Verizon and AT&T.
The group confirmed its aim to generate positive free cash flow by year end, the central aim of Combes' turnaround. But it consumed 332 million euro more cash than it generated in the quarter, an improvement of 66 million.
(Reporting by Leila Abboud and Gwenaelle Barzic; Editing by James Regan and Andrew Callus)