Alcatel-Lucent’s CEO States The Company Is In Good Shape From A Cash Standpoint


Paris, France,-/Wi-Fi Technology News/- Alcatel-Lucent’s Board of Directors (Euronext Paris and NYSE: ALU) reviewed and approved reported results for the third quarter 2008. During the quarter, revenues declined 6.6% year-over-year and decreased 0.9% sequentially to Euro 4.065 billion. At constant exchange rate, revenues declined 2.2% year-over-year and 2.9% sequentially.

At constant exchange rate and on a year-over-year basis, Carrier revenues declined 9.4%, Enterprise revenues grew 6.3% and Services revenues grew 16.6%. The adjusted2 gross margin was 32.5% of revenues, or 33.0% excluding a currency hedging loss of Euro 23 million. Adjusted operating expenses declined 9.6% year-over-year and 4.5% sequentially, leading to an adjusted2 operating income1 of Euro 40 million or 1.0% of revenues. Adjusted2 net income was Euro 41 million or Euro 0.02 per diluted share, including a one-time income of Euro 63 million pre tax and of Euro 38 million after tax resulting from the amendment of the post retirement healthcare plan.


Executive commentary

Ben Verwaayen, CEO commented: “I am delighted to have joined Alcatel-Lucent, a company which has the talent, technologies and customer base to grow profitably in its market.

First, let me state that we are in good shape from a cash standpoint. We achieved a positive cash flow from operating activities this quarter through the reduction of our operating working capital requirements. The funded status of our pensions and other post retirement benefits remains materially positive with a prudent asset allocation. With gross cash on hand and marketable securities of Euro 4.46 billion and less than Euro 1 billion worth of bond debt maturing in the next 12 months, we are adequately funded.

Second, we met our revenue guidance in a more challenging macroeconomic environment. In addition to the ongoing CDMA decline, we saw a reduction in spending by certain customers in developed markets, especially in fixed access and terrestrial optics. This was partly offset, however, by the strong performance of certain carrier activities, including W-CDMA, NGN and submarine networks. In addition, we continued to grow our Enterprise business at a healthy rate and saw accelerated growth in Services.

Having said that, our profitability remains unsatisfactory. The gross margin came in at the lower end of our expectations in the third quarter, reflecting an adverse shift in both our product and geographic mixes. In the carrier space, this was coupled to a declining top-line and led to an adjusted operating loss which calls for a set of actions that I will be describing over the coming period. I would nonetheless point to the high single-digit operating margin in the Enterprise segment and the double-digit operating margin in Services”.


Market and outlook

In its outlook for the third quarter, Alcatel-Lucent was already prudent in its view about the telecommunications market due to a weakening macroeconomic environment. Today, the company continues to anticipate that the global telecommunications equipment and related services market should be flat in 2008 at constant currency.

Alcatel-Lucent reiterates that its full year 2008 revenue, expressed in current Euro rate, should be down in the low to mid single-digit range. The company continues to expect an adjusted gross margin in the mid thirties and an adjusted operating margin in the low to mid single-digit range in percentage of revenue in full year 2008.

Based on its outlook for the fourth quarter, the company continues to expect its year-end net debt to be materially reduced compared to the level at the end of June 2008.


THALES

Alcatel-Lucent believes that it is possible to maintain its ongoing partnerships with Thales without necessarily having any capital tie. The company is currently reviewing all options regarding its 20.8% stake in Thales, including a potential sale, in the best interest of its shareholders.


Reported results

For the third quarter 2008, Alcatel-Lucent’s reported revenues amounted to Euro 4,065 million. The reported gross profit was Euro 1,319 million. Reported operating loss1 was Euro (85) million, including the negative impact from Purchase Price Allocation (PPA) entries of Euro (125) million. For the quarter, reported net loss (group share) was Euro (40) million or Euro (0.02) per diluted share (USD (0.03) per ADS), including the negative after tax impact from PPA entries of Euro (81) million.


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 PPA entries in relation to the Lucent business combination. These non-cash impacts are very material and non-recurring due to the different amortization periods depending on the nature of the adjustments, as detailed in the annex. Reported figures are not comparable with our main competitors and many business players who have not undergone any similar business combinations as the Alcatel and Lucent one.

For the third quarter 2008, Alcatel-Lucent generated revenues of Euro 4,065 million, compared to Euro 4,350 million in the year-ago quarter, a decrease of 6.6%. The adjusted2 gross profit was Euro 1,320 million or 32.5% of revenues, compared to an adjusted2 gross profit of EUR 1,486 million or 34.2% of revenues in the year ago-quarter. Adjusted2 operating income1 was Euro 40 million, 1.0% of revenues, compared with an adjusted2 operating profit of Euro 70 million or 1.6% of revenues in the year-ago quarter. Adjusted2 net income (group share) was Euro 41 million or Euro 0.02 per diluted share (USD 0.03 per ADS), compared to an adjusted2 net loss of Euro (258) million or Euro (0.11) per share (USD (0.16) per ADS) in the year-ago quarter.



Balance sheet and pension status

The net (debt)/cash position was Euro (600) million as of September 30, 2008, compared with
Euro (415) million as of June 30, 2008. The increase in net debt of Euro (185) million primarily reflects the low level of operating profitability this quarter, the cash outflow related to restructuring plans (Euro (113) million), a still high contribution to pensions (Euro (98) million) and the impact of currency translation on our net debt position (Euro (68) million) partially offset by a Euro 128 million reduction in total working capital requirements.

The funded status of pensions and Other Post Employment Benefits (OPEB) amounted to a surplus of Euro 2.997 billion as of September 30, 2008, up from Euro 2.848 billion as of June 30, 2008. This increase essentially reflects a favourable currency translation impact on the funded status of US plans, which was stable sequentially in USD terms. The funded status of our non US plans decreased slightly.


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Note: 3rd quarter 2008 reported and adjusted income statement is available here as a PDF file: http://www1.alcatel-lucent.com/3q2008/pdf/annex_E.pdf