Alcatel-Lucent reports third quarter 2007 results

(31 ott 2007) -

• Revenues at Euro 4.35 billion, up 2.3% sequentially and down 7.8 % year-over-year at constant Euro/USD exchange rate[1]

• Adjusted operating income[2] at Euro 70 million

• Adjusted net income (loss) (Group share) at Euro (258) million (Euro (0.11) per diluted share, including restructuring

• 3-part Plan to improve profitability, resulting in incremental savings of Euro 400 million in gross margin and comparable[3] operating expenses by the end of 2009

• Streamlining of the management team

 

Paris - 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 :

            -  high value added services and applications for the carrier markets

            - 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.”

 

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.

 

  

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