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By Leila Abboud and Gwénaëlle Barzic
PARIS, Feb 6 (Reuters) - Telecom equipment maker Alcatel-Lucent pledged to lift profitability again this year through cost cuts after six straight quarters of gross margin improvements, and to list its submarine division in the second half.
Chief Executive Michel Combes also expressed confidence on Friday that the company would achieve the central pledge of his turnaround plan which started in June 2013, namely to achieve positive free cash flow by the end of this year.
Alcatel-Lucent, which competes with Sweden's Ericsson , China's Huawei and Finland's Nokia , has not posted regular profits or cash flow since its creation in 2006 because it is smaller in the mobile sector than competitors and tough competition from Chinese vendors.
Last year, it spent 420 million euros ($481 million) more than it made in cash from operations.
Nevertheless, there were signs that Combes' efforts have begun to pay off. Fourth-quarter sales fell 6 percent to 3.68 billion euros ($4.2 billion), though operating profit doubled from a year earlier to reach 284 million euros.
Cost cuts on everything from real estate to staff helped the company increase gross margins to 34.7 percent from 33.4 percent in the same period a year ago.
Analysts had expected fourth-quarter sales of 3.69 billion euros and a gross margin of 33.9 percent, according to Thomson Reuters I/B/E/S. Net income was forecast at 201 million euros.
"These earnings demonstrate clearly that Alcatel-Lucent is back in the game," Combes said on a conference call.
Since Combes arrived at Alcatel-Lucent, the company has laid off 10,000 people, sold assets worth about 600 million euros, and done a 1 billion euro capital increase to shore up its finances.
The last expected asset sale is the initial public offering of the submarine division, which lays undersea cables that are the backbone of the Internet.
Chief Financial Officer Jean Raby said preparations for the listing were on track and it would take place in the second half of the year, depending on market conditions.
Combes has also streamlined the company's product portfolio to put more emphasis on the smaller business of selling so-called edge and core routers that direct Internet traffic.
Sales of such IP routing products rose 6 percent last year to reach 2.37 billion euros, a sharp contrast to the 4 percent drop in revenue from mobile and broadband access to 7.16 billion euros.
$1 = 0.8730 euros Editing by Astrid Wendlandt and David Clarke