Alcatel-Lucent reports third quarter 2007 results

Note: 2007 reported and adjusted profit and loss statement is enclosed in Annex, click here

Paris, October 31, 2007 - Alcatel-Lucent’s Board of Directors (Euronext Paris and NYSE: ALU) reviewed and approved reported results for the third quarter 2007.

During the quarter, revenues grew sequentially by 2.3% at a constant Euro/USD exchange rateand gross margin improved sequentially to 34.2%.  All of the company’s business segments grew sequentially in Q3 2007. Within the Carrier Segment, the optical network business saw strong double-digit growth, and the GSM business continued to gain traction due to a refreshed portfolio, registering a second consecutive quarter of double-digit revenue growth.  For the quarter the company saw a 5.6% reduction in operating expenses on a comparable basis³ related to the third quarter 2006 and a 3.2% reduction sequentially. The company continues to execute on its integration plans and during the quarter reduced approximately 1,000 positions. Year-to-date the company has reduced headcount of 5,000 people before the impact of managed services and acquisitions (approximately 1,350 people). The company plans to achieve its synergy-related comparable³ pre-tax savings of Euro 600 million this year.  As previously stated, savings accounted for in gross margin this year will not be retained due to current market conditions; however, the company does expect to retain most of its operating expense savings.

Executive Commentary

CEO Pat Russo commented:

“As you can see our results this quarter were essentially in line with the update we provided on September 13, and in a few areas a bit better; however they are still not at a level that we are satisfied with.

We believe that our strategy, our product portfolio and our expertise align with the long-term market drivers that will underpin the industry for the next several years, as networks migrate to all-IP based architecture. During the first nine months of operations as a single company, we strengthened our position in key strategic markets and technologies such as IP and mobile broadband required to position the company for long-term sustained growth. Having said that, and in spite of the promise of this industry and the long term benefits of the merger, we recognize that market conditions remain difficult, with continued pressure on revenues and margins due to intensified competition and some slowdown of spending in North America. These market conditions along with our commitment to transform the company for the long term   lead us to put in place an aggressive three-part plan to improve profitability and reposition the  business.”

The Board fully supports the plan presented which includes:

• streamlining the core carrier business, accelerated product cost improvement with increased portfolio focus on IP transformation of wireline and wireless networks.
• enhancing growth by developing an offensive strategy on sectors offering a strong growth potential, namely :

o        high value added services and applications for the carrier markets

o        solutions for the enterprise markets and Industry and Public Sector.

streamlining our organization into a simplified model with a focused management committee with clear accountabilities and ownership to quickly execute the plans

This plan will result in an acceleration of cost structure improvement, especially in support functions and other savings arising from the realigned and streamlined Carrier business Group. The company expects that this plan will result in incremental savings of Euro 400 million in gross margin and comparable[4] operating expenses by the end of year 2009. This implies an acceleration of our ongoing headcount targets into 2008 with incremental reductions of about 4,000 by 2009.

Pat Russo further added: “These are difficult but necessary decisions, and we will manage these reductions with care. With this plan, the company is targeting gross margins in the high 30’s and operating margins[5] of 10% or better in the post integration phase beginning 2010.”

 

Outlook

For the fourth quarter 2007 the company expects a solid ramp up in revenue over the third quarter 2007.  For the full year, given some of the recent uncertainty seen in the market, revenues are likely to be around flat at constant Euro/USD exchange rate which is at the low end of the range previously provided.

REPORTED RESULTS

In accordance with regulatory reporting requirements, the third quarter 2007 reported results include the non-cash impacts from purchase price allocation entries following the merger with Lucent Technologies. The global Thales transaction has been closed during the second quarter 2007 and all activities which have been disposed of or contributed to Thales as of June 30, 2007 (space activity on April 10, 2007 and railway signaling and integration and services activities for mission-critical systems on January 5, 2007) are not included in third quarter 2007 results.

For the third quarter 2007, Alcatel-Lucent’s reported revenues amounted to Euro 4,350 million. The reported gross profit was Euro 1,487 million, including the impacts from purchase price allocation entries of Euro 1 million. Reported operating income (loss)[6] was Euro (74) million, including the impact from purchase price allocation entries of Euro (144) million. For the quarter, reported net loss (group share) was Euro (345) million or Euro (0.15) per diluted share (USD (0.21) per ADS), including the impact from purchase price allocation entries of Euro (87) million.

ADJUSTED RESULTS

In addition to the reported results Alcatel-Lucent is providing adjusted financial results in order to provide meaningful comparable information, which exclude the main non-cash impacts from purchase price allocation entries. The global Thales transaction has been closed during the second quarter 2007 and all activities which have been contributed to Thales as of June 30, 2007 (space activity on April 10, 2007 and railway signaling and integration and services activities for mission-critical systems on January 5, 2007) are not included in third quarter 2007 results. Prior period results refer to the adjusted pro forma combined operations for Alcatel-Lucent as of January 1, 2006.

For the third quarter, Alcatel-Lucent’s revenues were Euro 4,350 million, compared to a pro-forma Euro 4,909 million in the year-ago quarter, an 8% decrease at a constant Euro/USD exchange rate, or an 11% decline at current rate. The adjusted gross profit was Euro 1,486 million, 34.2% of sales, compared to an adjusted pro-forma gross profit of Euro 1,925 million in the year-ago quarter. Adjusted operating income (loss)[7] was Euro 70 million, 1.6% of sales, compared with an adjusted pro-forma operating income (loss) of Euro 430 million in the year-ago quarter. For the quarter, adjusted net loss (group share) was Euro (258) million, or Euro (0.11) per diluted share (USD (0.16) per ADS). The adjusted pro-forma net income (group share) was Euro 532 million, or Euro 0.23 per diluted share (USD 0.33 per ADS), in the third quarter 2006.

The net (debt)/cash position was Euro (124) million as of September 30, 2007, compared with Euro 221 million as of June 30, 2007.

 

 

* Net income (loss) (Group share) and EPS are adjusted from main PPA (Purchase Price Allocation) entries taking into account a normative tax impact

**E/ADS has been calculated using the US Federal Reserve Bank of New York noon Euro/dollar buying rate of USD 1.4219 as of September 28, 2007.
 

THIRD QUARTER 2007 BUSINESS HIGHLIGHTS

The following figures are based on adjusted results.

 

Segment breakdown (in Euro million)	Third Quarter 2007	Third Quarter 2006	yoy comparison at constant rate	Second Quarter  2007	qoq comparison at constant rate
		Pro-forma
Revenues	4,350	4,909	(8)%	4,326	2%
Carriers	3,142	3,706	(12)%	3,104	2%
- Wireline	1,520	1,447	8%	1,505	2%
- Wireless	1,276	1,674	(20)%	1,237	4%
- Convergence	346	585	(39)%	362	(3)%
Enterprise	380	362	8%	376	2%
Services	777	775	3%	750	4%
Other & Eliminations	51	66		96
Operating income (loss)	70	430		(19)
Carriers	22	389		(73)
Enterprise	29	24		23
Services	40	60		29
Other & Eliminations	(21)	(43)		2

 

BUSINESS COMMENTARY

The following business comments are based on a year over year comparison, unless otherwise stated. Business trend comparisons are based on variations at a constant Euro/USD exchange rate.

Carrier Business Segment

For the third quarter 2007, revenue for the carrier business segment was Euro 3,142million compared to Euro 3,706 million in the year-ago quarter, an 8% decrease at a constant Euro/USD exchange rate, or a15% decrease at current rate. Adjusted operating income (loss) was Euro 22million, a 0.7% operating margin.

Wireline

For the third quarter 2007, revenue for the wireline business group was Euro 1,520million compared to Euro 1,447 million in the year-ago quarter, an 8% increase at a constant Euro/USD exchange rate, or a5% increase at current rate.

Key Highlights:

• Revenues were very strong in optical networking with good growth in terrestrial and a robust increase in submarine.  Metro and long-haul WDM exhibited a very strong performance. North America, Europe and South and Asia-Pacific increased on a regional basis.
• Broadband access also demonstrated a solid quarter in DSL with 8.0 million lines delivered (24.9 million lines delivered year to date), up 19% year over year, with strong traction in North America, clearly showing continuous momentum since the merger. Alcatel-Lucent maintained the #1 position in IP DSLAM with ISAM product family. Alcatel-Lucent strengthened its leadership in GPON and signed a number of new deals during the quarter, including Neuf Cegetel.
• IP exhibited another dynamic quarter with strong revenues and solidifying the #2 position in Edge Routing. For the fifth straight quarter, Alcatel-Lucent was #2 in Ovum RHK’s Service Provider Edge IP/MPLS segment with a 21% market share. For the first time, Dell’Oro Group recognized Alcatel-Lucent as the #2 service provider edge router vendor with a 17% market share. SFR selected Alcatel-Lucent as its sole supplier for its nationwide IP/MPLS transport infrastructure.

Wireless

For the third quarter 2007, revenue for the wireless business segment was Euro 1,276million compared to Euro 1,674 million in the year-ago quarter, a 20% decrease at a constant Euro/USD exchange rate, or a24% decrease at current rate.

Key Highlights:

• The wireless revenue decline was largely due to a comparison with very strong CDMA results in North America in the year-ago quarter, when significant initial revenues were booked for the deployment of CDMA2000 1x-EV-DO Rev A by major operators following the commercial availability of the enabling software. Sequentially, CDMA revenue slightly grew as CDMA gained outside North America, primarily in India, and Rev A deployments continued in North America and globally..
• Revenue in GSM declined from the year-ago quarter but continued to gain traction with its second consecutive strong sequential increase, notably with new product offerings (Twin TRX and ATCA BSC). In GSM/EDGE, Alcatel-Lucent announced new deployments or expansions with key customers in high growth economies including China Mobile, Uganda’s Hits Telecom and Uganda Telecom, Mongolia’s Mobicom and Egypt’s Mobinil.
• The 3G business announced significant contracts in all areas of the portfolio, including:

o       A W-CDMA/HSPA win with Uganda Telecom, an HSUPA deployment with mobikom Austria, and a trial of the company’s Base Station Router (BSR) Femto for in—building applications with Japan’s Softbank Mobile.

o       CDMA/EV-DO Rev. A contracts with Cricket Communications and Ntelos in the U.S., Skylink in Russia and UMC in Ukraine. Additionally, Cellular South recently announced that it invested in upgrades to its CDMA2000 network, preparing them for RevA roll-outs.

o       A TD-SCDMA expansion with China Netcom in Qingdao, in cooperation with Alcatel-Lucent’s flagship company in China, Alcatel Shanghai Bell and its partner Datang Mobile.

• The company announced a series of new commercial WiMAX contract in Q3 with customers including Pakistan’s Mobilink (a subsidiary of Orascom), Germany’s VSE NET, Taiwan’s Far EasTone, Russia’s Synterra and Brazil Telecom.  The company also announced a new trial with France’s Bollore.  Since the beginning of 2007, Alcatel-Lucent signed more than 70 pilots and deployments across the world and 15 commercial contracts signed since the beginning of 2007. ONEMAX, our customer in the Dominican Republic, opened commercial service last week on its WiMAX network. This is the first WiMAX network commercially launched in the 3.5 GHz band - a world premiere.

Convergence

For the third quarter 2007, revenue for the convergence business group was Euro 346 million compared to Euro 585 million in the year-ago quarter, a 39% decrease at a constant Euro/USD exchange rate, or a 41% decrease at current rate.

Key Highlights:

• In a continued competitive market, classic core switching revenue continued to decline.
• Alcatel-Lucent has increased its share of the next generation core networking market since the merger, but that business is still not nearly big enough to offset the declines in legacy core networking.
• In the multimedia and payment businesses, revenues were negatively impacted by the declining market in pre-paid payment solutions. Investments continued in order to evolve IPTV capabilities, including the acquisition of Tamblin, a London-based developer of applications and tools that enables interactive TV programming and advertising over IP.
• Alcatel-Lucent continued to gain traction in the NGN/IMS market with contract wins at Hits Telecom Uganda for a Mobile NGN solution; Mongolia’s Mobicom for a nation-wide NGN network, including softswitches, gateways and a convergent real-time payment solution; and Polish operator Exatel SA for an IMS platform.
  
  

Enterprise Business Segment

For the third quarter 2007, revenue for the enterprise business segment was Euro 380 million compared to Euro 362 million in the year-ago quarter, an 8% increase at a constant Euro/USD exchange rate, or a 5% increase at current rate. Adjusted operating income (loss) was Euro 29 million, a 7.6% operating margin.

 

Key Highlights:

• Revenues increased across all parts of the enterprise business, with a very strong performance in the Asia-Pacific region. Customer PCCW in Hong Kong is using Alcatel-Lucent technology to offer cellular extension, push mails, unified communications to 200,000 small and medium businesses.  Korea telecom is leveraging the Alcatel-Lucent VitalQIP to offer managed services to 7 million IP subscribers.
• The voice and data business contributed to the segment’s growth: the data business continued to perform well, delivering strong double-digit growth year over year for the third consecutive quarter. IP usage penetration rates increased, reaching 43% year to date, versus 36% for the same period in 2006.
• Following Alcatel-Lucent’s introduction of new security solutions, Sprint Nextel introduced a new security service to enterprises using the Alcatel-Lucent OmniAccess 3500 Nonstop Laptop Guardian to offer comprehensive security for corporate laptops of mobile employees.
• Genesys, Alcatel-Lucent’s contact center activity, continued to perform well and execute well in its core market of large enterprises, while extending its market reach via capabilities for managed services. Genesys reported strong growth in Europe.  AT&T announced an expanded relationship with Genesys in which AT&T is both certifying the advanced Genesys SIP Server product with AT&T's Internet Protocol (IP) Toll-Free service and adding the Genesys suite to its Integrated Contact Services (ICS) portfolio of managed contact center services.

 

Services Business Segment

For the third quarter 2007, revenue for the services business segment was Euro 777million compared to Euro 775 million in the year-ago quarter, a 3% increase at a constant Euro/USD exchange rate, or flat at current rate. Adjusted operating income (loss) was Euro 40million, a 5.1% operating margin.

Key Highlights:

• The acquisition of telecommunications consulting firm TAG expands Alcatel-Lucent’s enterprise services business and will help enterprise customers by leveraging network outsourcing resources
• Network operations and hosted services registered a strong performance with a key contract with Orange Switzerland to outsource the maintenance and network operations of its entire mobile network as well as a two-year extension of its existing contract with E-Plus, the third largest mobile carrier in Germany, for the expansion, maintenance and operation of its mobile network.
• Multi-vendor maintenance revenue and a Multi-vendor Single Point-of-Contact solution continued to grow based on new orders and support for existing networks. Alcatel-Lucent will provide installation, maintenance and network integration for I.T.E.N.O.S, a subsidiary of Deutsche Telekom.
• Key network integration contracts were signed with China Unicom, China Mobile and Reliance Communications to provide wireless network optimization and project management services.
• IPTV remains a major driver of IP network transformation and continues to present major market opportunities. Alcatel-Lucent was selected by SingTel, which will enhance its mio TV Service with Alcatel-Lucent’s end-to-end suite of network integration services and Triple Play solutions, and by Shanghai Telecom to provide consulting, implementation, management, and maintenance services.

 

Note: 2007 reported and  adjusted profit and loss statement is enclosed in Annex, click here

 

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Alcatel-Lucent will host an audio webcast at 1:00 p.m. Paris time (12:00 p.m. London and 8:00 a.m. New York), which can be accessed athttp://www.alcatel-lucent.com/3q2007.