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Key numbers for the fourth quarter 2008
• Revenues of Euro 4.954 billion, within
the company’s expectations
•
Adjusted2 gross profit of Euro 1.648 billion or
33.3% of revenues
•
Adjusted2 operating
income1 of Euro 297 million or 6.0% of
revenues
• Goodwill and other intangible assets
impairment charge of Euro (3.910) billion
• Reported net income (group share) of
Euro (3.892) billion or Euro (1.72) per diluted share
• Operating cash
flow3 of Euro 658million
• Net debt of Euro (389) million as of
December 31, 2008
Key numbers for the year 2008
• Revenues of Euro 16.984billion, down
4.5% year over year (down 1.1%at constant currency)
•
Adjusted2 gross profit of Euro 5.800 billion or
34.1% of revenues
•
Adjusted2 operating
income1 of Euro 466 million or 2.7% of
revenues
• Goodwill and other intangible assets
impairment charge of Euro (4.725) billion
• Reported net loss (group share) of
Euro (5.215) billion or Euro (2.31) per diluted share
• Funded status of pensions & OPEB
negative at year-end 2008, no additional funding anticipated through 2010
Click here for key figures for 4th quarter and full year
2008
Click here for 4th quarter 2008 reported and adjusted income
statement
EXECUTIVE COMMENTARY
Ben Verwaayen, CEO, commented:
“In the fourth quarter, we did what we said we were going to do. I am
encouraged by our operating performance, measured by our ability to achieve our
top-line, operating margin and cash flow targets. The asset impairment charge
that severely impacted our bottom line was made necessary by the drastic
deterioration of the global economic outlook during the fourth quarter as well
our decision to shift to a more focused portfolio. With an improving balance
sheet, adequate funding, a new strategy in place and a clear roadmap to
profitability, we are committed to executing on our plans to deliver better
solutions and services to our customers and better returns to our
shareholders”.
KEY HIGHLIGHTS
Alcatel-Lucent delivered solid operational performance in the fourth
quarter, enabling it to meet its guidance on all three of the financial metrics
it had indicated for 2008.
• The
company met its revenue guidance. The reported revenue decline of 4.5% in
2008 - within the indicated range of low to mid single-digit – is largely
attributable to the shift in currencies. At constant currency exchange rates,
revenue fell by 1.1% in 2008, in an economic environment that grew considerably
more challenging in the latter part of the year. At constant currency exchange
rates, fourth quarter revenue declined 7.5% year-over-year and increased by
16.9% sequentially. As anticipated, carrier revenues were impacted by some
capital expenditure constraints in the fourth quarter, notably in fixed and
mobile access. This was partially offset, however, by the strong performance of
other carrier segments such as IP routing, submarine and Next Generation
Networks, the resilience of the Enterprise business and solid growth in
Services.
• The
operating profitability target was achieved. Adjusted
gross margin came in at 34.1% for the full year, at the lower end of the
mid-thirties range which had been indicated, after a slight sequential
improvement in the fourth quarter. Coupled with the reduction in operating
expenses, this led to an adjusted operating margin of 2.7% for 2008, within the
low to mid single-digit guidance range which had been indicated at the start of
the year. The fourth quarter adjusted operating profit reached 6.0% including
the net positive impact of 0.2percentage point from one-time items.
• The
cash flow target was achieved: At year end 2008, net debt was brought down
to Euro (389) million, below the end-June level of Euro (415) million as
indicated, thanks to an operating cash flow3 of
Euro 658 million in the fourth quarter, the highest since the close of the
merger. The divestiture of the stake in Thales for Euro 1.6 billion is
proceeding on plan. With cash and marketable securities of Euro 4.6 billion and
the availability of the Euro 1.4 billion credit line, Alcatel-Lucent remains
adequately funded.
REPORTED RESULTS, BALANCE SHEET, PENSIONS & OPEB
Reported results: during the fourth quarter, the deterioration of the
economic environment and the drop in the company’s market capitalisation led to
a thorough re-assessment of the carrying value of goodwill and other intangible
assets on its balance sheet. The re-assessment of the company’s near-term
outlook taking into account more conservative growth assumptions for the
telecommunications equipment and related services market in 2009, coupled with
the decision to streamline the company’s portfolio and with the use of a higher
discount rate led to an asset impairment charge of Euro (3.910) billion. This
is reflected in the fourth quarter net loss (group share) of
Euro (3.892) billion or Euro (1.72) per diluted share (USD (2.39) per
ADS). For full year 2008, Alcatel-Lucent booked total asset impairment charges
of Euro (4.725) billion, reflected in the full year net loss (group share) of
Euro (5.215) billion or Euro (2.31) per share (USD (3.22) per ADS).
Balance sheet highlights: the net (debt) cash position was Euro (389)
million as of December 31, 2008, compared with Euro (600) million as of
September 30, 2008. The sequential reduction in net debt of Euro 211 million
primarily reflects the higher level of operating profitability this quarter and
a positive contribution from Pensions and OPEB due to Section 420 transfers
(Euro +99 million), partially offset by cash outflow related to restructuring
(Euro (172) million).
Pensions & OPEB: From an accounting perspective (IAS 19), the
funded status of pensions and Other Post Employment Benefits (OPEB) amounted to
a deficit of Euro (429) million as of December 31, 2008 compared to a surplus
of Euro 2.997 billion as of September 30, 2008. This mainly resulted from the
sharp year-end decline in the AA corporate interest rates used to calculate the
net present value of benefit obligations. Plan assets were more stable as the
decline in equities was partially offset by a rise in the value of corporate
bonds. From a regulatory perspective - which determines the funding
requirements - the funded status of US plans remained positive at year end 2008
and no funding contribution is expected through at least 2010. As of December
31st, 2008, the global allocation of the group’s plan assets
remained significantly overweight Fixed income, accounting for 63% of the
total.
ADJUSTED RESULTS
In addition to the reported results, Alcatel-Lucent is providing adjusted
results in order to provide meaningful comparable information, which exclude
the main non-cash impacts from Purchase Price Allocation (PPA) entries in
relation to the Lucent business combination.For the fourth quarter 2008, the
adjusted2 gross profit was Euro 1.648 billion or
33.3% of revenue and the adjusted2 operating
income1 was Euro 297 million or 6.0% of
revenues.
In the fourth quarter 2008, Alcatel-Lucent booked three one-time items
including a capital gain on the sale of Intellectual Property Rights, proceeds
from a litigation settlement and a material provision for a contract loss. Two
of these three items impacted the adjusted gross profit with a net negative
effect of Euro 14 million or 0.5point in percentage of revenue. The third one
reduced operating expenses by Euro 27 million. The net impact of all three
items on the adjusted operating profit was therefore a positive Euro 13 million
or 0.2 point in percentage of revenue.
The fourth quarter 2008 adjusted2 net loss
(group share) was Euro (1.321) billion or Euro (0.58) per diluted share (USD
(0.81) per ADS), including an impairment charge of Euro (934) million for
goodwill and other intangible assets not related to the Lucent combination. The
full year 2008 adjusted2 net loss (group share)
was Euro (1.597) billion or Euro (0.71) per share (USD 0.98 per ADS).
OUTLOOK AND PROGRESS ON STRATEGIC PLAN
Alcatel-Lucent reiterates its guidance for
2009. The company expects the global telecommunications
equipment and related services market to be down between 8% and 12% at constant
currency in 2009. The company continues to anticipate an adjusted operating
profit around break-even in 2009.
Progress on strategic plan: since January 1st, the new
organisation is in place and the newly appointed team has started to implement
the new business model and execute its strategic plan:
• The plan to reduce costs
by Euro 750 million on an annual run rate by end 2009 is progressing. The
realignment of management positions, due to a reduction in span of control, is
underway and the 5,000 reduction in the number of contractors is being
executed.
• Alcatel-Lucent has started
to implement its plan to introduce more focused R&D and streamline its
product portfolio, starting with mature technologies and the refocusing of
its WiMAX investment on the enhanced wireless DSL market opportunity, while at
the same time significantly boosting investments in LTE.
• Alcatel-Lucent is
currently exploring co-sourcing and partnering options.
BUSINESS COMMENTARY
Please note that all the following business comments are based on a
year-over-year comparison at constant exchange rate, unless otherwise
specified.
CARRIER OPERATING SEGMENT
For the fourth quarter 2008, revenues for the Carrier operating segment were
Euro 3.295 billion a decrease of (11.8) % compared to Euro 3.734 billion in the
year-ago quarter, and an increase of 20.5% compared to Euro 2.734 billion in
the third quarter 2008. At constant currency exchange rates, Carrier revenues
decreased 13.9%year-over-year and increased16.1%sequentially. The segment
posted an
adjusted2 operating1 profit
of Euro 45 million or an operating margin of 1.4% compared to a profit of Euro
93 million or a margin of 2.5% in the year ago period.
Key highlights:
• Fixed access revenue
declined at a double-digit rate this quarter, impacted by the ongoing decline
of the legacy ADSL market in Europe and North America. Alcatel-Lucent shipped
6.7 million DSL ports in the quarter, down 21% from the year-ago quarter and up
12% sequentially While the deployment of next generation, fibre-based access
networks has been slower than expected for both regulatory and economic
reasons, Alcatel-Lucent is best positioned to benefit, with a four-quarter
rolling market share ending in the third quarter 2008 of 46% in both theVDSL
and GPON segments, according to Dell’Oro.
• Alcatel-Lucent enjoyed its
highest quarter ever in IP/MPLS service router revenues, with strong
double-digit growth, reflecting the success of the upgraded product portfolio
as well as increased customer diversification, notably in North America. The
company’s IP/MPLS service routers started shipping to 15 new customers in the
fourth quarter, taking the total customer base to more than 250 customers in
more than 100 countries. The ATM switching business continued on its structural
decline path.
• Optical networking revenue
was impacted by the slowdown in the terrestrial market, particularly in the
long distance Dense-Wave Division Multiplexing (D-WDM) segment. This was partly
offset by very strong growth in submarine networks and healthy growth in
microwave transmission. Alcatel-Lucent is enjoying good traction with its
latest introductions, with 60 customers for the next generation optical
transport system (1850 TSS) and a total of 25 contracts and trials for the
newly introduced microwave packet transport system (9500 MPR).
• In mobile networks, GSM
revenue declined at a lower rate than in the third quarter as the Chinese
market recovered after the freeze on network expansions due to the Olympics.
W-CDMA revenue was more or less stable when compared to a strong year-ago
quarter but grew approximately 50% for the year as whole. CDMA revenue declined
at a much lower rate than in the prior two quarters and enjoyed strong
sequential recovery, driven by shipments to a new customer in China as well as
higher-than-expected capital spending by a large North American CDMA
operator.
• In the Chinese 3G market,
where the vendor selection process is ongoing, Alcatel-Lucent believes it is
now well positioned to be one of the top three suppliers and expects to be
present in all three technologies (CDMA EV-DO, TD-SCDMA, and W-CDMA) with an
increased market share compared to 2G technologies. This should result in
material volume shipments starting this year, more than compensating for the
expected decline of the Chinese 2G market.
• The company’s core
switching activities were impacted by the strong decline in legacy TDM voice.
After another quarter of double-digit growth, revenues in NGN/IMS are now
higher than in legacy TDM switching. Alcatel-Lucent’s IMS solution continued to
gain traction, with two more customer wins in Canada and Brazil this
quarter.
• Revenue from applications
was impacted in the fourth quarter by the decline in legacy payment and
Intelligent Networks (IN). Alcatel-Lucent nonetheless enjoyed good growth in
Subscriber Data Management and Messaging.
ENTERPRISE OPERATING SEGMENT
For the Fourth quarter 2008, revenues for the Enterprise operating segment were
Euro 433 million, a decrease of (0.4)% compared to Euro 435 million in the
year-ago quarter and an increase of 11.7% compared to Euro 388 million in the
third quarter 2008. At constant currency exchange rates, Enterprise revenues
decreased 2.4% year-over-year and increased 7.5% sequentially.
Adjusted2 operating
income1 was Euro 55 million, or 12.6% of revenues
compared to Euro 56 million or 12.8% in the year-ago quarter.
Key highlights:
• Enterprise Solutions grew
slightly in the quarter in spite of deteriorating economic conditions. The
decline in the SMB voice telephony market was more than compensated by slight
growth in the large enterprise voice telephony market and double-digit growth
in data networking. Revenue from security solutions doubled in the quarter,
albeit from a small base, driven in part by the success of the company’s
firewall solutions.
• Genesys, the contact
centre software activity, returned to double-digit growth in the fourth
quarter, with a stronger-than-expected finish to the year across all product
lines and geographies.
• From a geographic
standpoint, revenue grew strongly in North America driven by the ongoing
implementation of a large end-to-end contract, contracted slightly in EMEA and
declined in both Latin America and APAC.
• The adjusted operating
margin was almost stable from the year-ago quarter, in spite of the slight
revenue decline, reflecting a slight improvement in the segment gross
margin.
SERVICES OPERATING SEGMENT
For the fourth quarter 2008, revenues for the Services operating segment
were Euro 1.086billion an increase of 6.4% compared to Euro 1.020 billion in
the year-ago quarter and an increase of 24.8% compared to Euro 870 million in
the third quarter 2008. At constant currency exchange rates, Services revenues
increased 6.6% year-over-year and increased 23.3% sequentially.
Adjusted2 operating
income1 was Euro 91 million or 8.4% of revenues
compared to Euro 107 million or 10.5% of revenues in the year ago quarter.
Key highlights:
• Network operations enjoyed
another quarter of very strong growth, driven by some of the large contract
wins booked throughout the year, including Brazil Telecom, Reliance, Orange
Switzerland, Sunrise and BT.
• Network integration
reported growth in the mid teens this quarter, similar to the prior quarter,
driven by complex network design, network optimisation and network
transformation projects.
• Professional services
revenues were impacted by the above mentioned slow-down in the market for
legacy applications including payment and IN. IPTV and OSS integration
continued to grow strongly.
• Finally, Maintenance revenue
grew at a mid single-digit rate this quarter.
• The profitability of the
segment was down both year-over-year and sequentially, which is largely
attributable to a material provision for a turn-key contract. For the year 2008
as a whole, the adjusted operating margin of the Services segment improved
materially from 4.6% to 7.8% which reflects the double-digit revenue growth, a
favourable product mix and an improvement in the gross margin of all four
activities.
Alcatel-Lucent will host a press and analyst conference at its headquarters
at 1:00 p.m. CET which can be followed through audio webcast
at http://www.alcatel-lucent.com/4q2008
Notes
All adjusted figures are unaudited.
1- Operating income (loss) is the Income (loss) from operating activities
before restructuring costs, impairment of assets, gain (loss) on disposals of
consolidated entities and post-retirement benefit plan amendment.
2- “Adjusted” refers to the fact that it excludes the main impacts from
Lucent’s purchase price allocation (See annex for detailed information).
3- “Operating cash flow” is defined as cash flow before changes in working
capital, interest/tax paid, restructuring cash outlay and pension & OPEB
cash outlay
2009 Upcoming events/ announcements
May 4, 2009 First quarter 2009 results
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