Second quarter 2008 revenue in line with guidance - Full year 2008 outlook confirmed

Paris, (PresseBox) - Key highlights for the quarter

- Revenues of Euro 4.101 billion, up 6.1% sequentially
- Adjusted2 gross profit of Euro 1.433 billion or 34.9% of revenues
- Adjusted2 operating income1 of Euro 93 million or 2.3% of revenues
- Adjusted2 net loss (group share) of Euro (222) million or Euro (0.10) per diluted share
- Goodwill impairment charge of Euro (810) million related to CDMA
- Reported net loss (group share) of Euro (1,102) million or Euro (0.49) per diluted share
- Chairman Serge Tchuruk and CEO Pat Russo to step down (see separate press release)

Alcatel-Lucent's Board of Directors (Euronext Paris and NYSE: ALU) reviewed and approved reported results for the second quarter 2008.

During the quarter, revenues declined 5.2% year-over-year and increased 6.1% sequentially to Euro 4.101 billion. At constant Euro/USD exchange rate, revenues grew 1.7% year-over-year and 8.5% sequentially. At constant exchange rate and on a year-over-year basis, Carrier revenues declined 3%, Enterprise revenues grew 7% and Services revenues grew 16%. The adjusted2 gross margin was 34.9% of revenues, of which 0.5-percentage point was due to a capital gain on the sale of real estate. Adjusted2 operating income1 was Euro 93 million or 2.3% of revenues.

During the second quarter of 2008, the CDMA activity declined at a higher pace than the company had planned. This was due, to a large extent, to a strong reduction in the capital expenditure of a key customer in North America. Although there are new opportunities in other geographic areas, the uncertainty regarding spending in North America has led the company to take more cautious mid-term assumptions in this activity. This has resulted in a goodwill impairment charge of Euro (810) million which is reflected in the reported net loss of Euro (1,102) million or Euro (0.49) per diluted share for the second quarter.

Executive commentary

Patricia Russo, CEO commented:

"Looking beyond the non-cash impairment charge, operationally we made good progress against our turnaround plan in the second quarter, delivering top-line and an adjusted operating margin in line with our expectations.

First, revenue performance came in at the higher end of our guidance, posting sequential growth of slightly more than 6%. We were able to fully absorb the material decline in CDMA, achieving year-over-year growth of close to 2% at constant Euro/USD exchange rate, thanks to the strong growth of our Enterprise and Services operating segments and good performance in most of our other carrier activities. Of particular note, GSM/W-CDMA/WiMAX continued to enjoy strong, double-digit growth year-over-year. In addition, our activities in convergence grew for the first time since completing the merger and we saw slight growth in our wireline activities.

Second, our adjusted gross margin is in the mid thirties, which is in line with our overall guidance for the year. Factoring out the impact of one-time gains, our gross margin increased by 150 basis points year-over-year, reflecting a more stringent pricing discipline and the impact of our product costs reduction programs. Sequentially, it declined 90 basis points, in spite of higher volumes, reflecting to a large extent a negative shift in the product and geographic mix.

Finally, we continue to make good progress in reducing our fixed costs. Our operating expenses declined 8.6% year-over-year and 1.7% sequentially. As a result, we achieved higher adjusted operating margins in all three business segments, with break-even performance in the carrier segment and high single-digit operating margins in the Enterprise and Services segments".

Market and outlook

Pat Russo, CEO, continued: "In our outlook for the second quarter and full year, we were prudent in our view of the telecommunications equipment market due to the macroeconomic environment and the resulting potential for lower capital spending in the US. Over the past three months, the global macroeconomic environment has further deteriorated and the economic slowdown has begun to spread to Europe. Although not evident yet, we believe this could impact somewhat the capital expenditure decisions of certain European customers, especially in fixed access.

At the same time, we are seeing a stronger-than-expected demand for GSM/W-CDMA mobile access in emerging markets, especially in Asia. In addition, we feel positive about our prospects in China, both in 2G and 3G (including CDMA EV-DO) for the fourth quarter and next year. Finally, we now see a stronger than initially expected demand in Services, especially in network operations and network integration. Against this mixed backdrop, we continue to anticipate that the global telecommunications equipment and related services market should be flat in 2008 at constant currency".

With approximately half of the company's revenue in US dollar or dollar-linked currencies, Alcatel-Lucent reiterates its previous guidance for the full year 2008 revenue. Expressed in current Euro rate and due to the reduction in the value of the dollar since 2007, revenue 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. For the third quarter 2008, Alcatel-Lucent expects its revenue to be flat to slightly down sequentially, followed by a strong ramp in the fourth quarter.

Reported results

For the second quarter 2008, Alcatel-Lucent's reported revenues amounted to Euro 4,101 million. The reported gross profit was Euro 1,432 million. Reported operating loss1 was Euro (21) million, including the negative impact from PPA entries of Euro (114) million. For the quarter, reported net loss (group share) was Euro (1,102) million or Euro (0.49) per diluted share (USD (0.77) per ADS), including the negative after tax impact from PPA entries of Euro (880) 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 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 second quarter 2008, Alcatel-Lucent generated revenues of Euro 4,101 million, compared to Euro 4,326 million in the year-ago quarter, a decrease of 5.2%. The adjusted2 gross profit was Euro 1,433 million or 34.9% of revenues, compared to an adjusted2 gross profit of EUR 1,447 million or 33.4% of revenues in the year ago-quarter. Adjusted2 operating income1 was Euro 93 million, 2.3% of revenues, compared with an adjusted2 operating loss of Euro (19) million or (0.4%) of revenues in the year-ago quarter. Adjusted2 net loss (group share) was Euro (222) million or Euro (0.10) per diluted share (USD (0.16) per ADS), compared to an adjusted2 net loss of Euro (336) million or Euro (0.15) per share (USD (0.20) per ADS) in the year-ago quarter.

Balance sheet and pension status

The net (debt)/cash position was Euro (415) million as of June 30, 2008, compared with Euro (30) million as of March 31, 2008. The increase in net debt of Euro (385) million primarily reflects an increase in non operating working capital requirements mainly related to the bonus payments which were concentrated in the second quarter, cash outflow related to restructuring plans (Euro (166) million), our cash contribution to pensions (Euro (112) million) and a slightly higher-than-anticipated cash income tax payment (Euro (48) million). Based on the above outlook for revenue and adjusted operating margin, Alcatel-Lucent expects its year-end 2008 net debt to be materially reduced compared to the level at the end of June 2008.

The funded status of pensions and other post retirement benefits (OPEB) amounted to a surplus of Euro 2.848 billion as of June 30, 2008, up from Euro 2.609 billion as of as of March 31, 2008.

Business Commentary

Please note that the all the following business comments are based on a year-over-year comparison at constant Euro/USD exchange rate, unless otherwise specified.

Carrier Operating Segment

For the second quarter 2008, revenues for the Carrier operating segment were Euro 2,811 million compared to Euro 3,104 million in the year-ago quarter, a 9.4% decrease at current exchange rate and a 3% decrease at constant rate. Adjusted2 operating1 profit was Euro 11 million, an operating margin of 0.4% compared to a loss of Euro (73) million or a negative operating margin of (2.3%) in the year ago period.

Key highlights:

- Fixed access revenue decreased at a double-digit rate, due to the ongoing decline in new subscribers to copper-based broadband access. Alcatel-Lucent shipped 7.7 million xDSL ports in the quarter, down 20% from the demanding basis of the year-ago quarter but up 16% sequentially. The year-over-year decline in xDSL revenue was only partially compensated by the very strong growth in FTTx revenue. Dell'Oro confirmed Alcatel-Lucent as the clear leader in the GPON-based FTTH segment, with a four-quarter rolling market share of 48% in the first quarter 2008.

- In data networking, growth in edge routing was softer this quarter than in the first one, which is essentially attributable to a demanding year-over-year comparison as well as the timing of deliveries at certain large customers. The ATM switching business continued on its structural decline path in the second quarter 2008, albeit at a more moderate rate than in the first quarter.

- Optical networking enjoyed strong double-digit growth this quarter, essentially driven by submarine activities and wireless transmission while terrestrial optical networks grew at a mid single-digit rate.

- In mobile networks, our GSM business grew at a double-digit rate in the second quarter, which was driven by network expansions in China, India, the Middle East and Africa. W-CDMA revenue grew very strongly, benefiting from the ramp-up in revenues at several key clients, including AT&T Mobility, Bouygues and SFR and sustained growth at other accounts such as Orange, SKT and KTF. CDMA revenue declined sharply year-over-year, hurt by the significant reduction in the capital expenditure of a key customer in North-America.

- Our core switching activities contracted at a moderate rate in the second quarter, as the ongoing decline in legacy TDM voice was almost entirely offset by the strong, double-digit growth in Fixed and mobile NGN. It must be noted that our NGN activity is now close in size to our TDM activity.

- Our applications activities grew in excess of twenty percent the second quarter, a sharp contrast to the moderate growth rate achieved in the first quarter, due to a pick-up in revenues from Messaging applications and a stabilisation in our legacy IN (Intelligent Networks) business.

Enterprise Operating Segment

For the second quarter 2008, revenues for the Enterprise operating segment were Euro 386 million compared to Euro 376 million in the year-ago quarter, an increase of 2.7% at current exchange rate and of 7% at constant rate. Adjusted2 operating income1 was Euro 29 million, or 7.4% of revenues compared to Euro 23 million or 6.1% in the year ago quarter.

Key Highlights:

- Enterprise Solutions grew in the high single-digit range, with a particularly strong performance in data networking but also good growth in IP Telephony. The division also showed progress in Security solutions, driven by recent successes in firewalls and additional orders for its Laptop Guardian product. From a geographic standpoint, growth remained solid in North America and was strong in APAC.
- Genesys, the contact centre software activity, enjoyed another quarter of double-digit growth, driven by a strong performance in Europe and good resilience in North America.
- The adjusted operating margin of the Enterprise operating segment increased both year-over-year and on a sequential basis. This is attributable for the most part to higher volumes, a positive shift in the product and geographic mix and solid progress in the product costs reduction programs.

Services Operating Segment

For the second quarter 2008, revenues for the Services operating segment were Euro 818 million compared to Euro 750 million in the year-ago quarter, an increase of 9.1% at current exchange rate and of 16% at constant rate. Adjusted2 operating income1 was Euro 71 million or 8.6% of revenues compared to Euro 29 million or 3.9% of revenues in the year ago quarter.

Key Highlights:

- Network operations grew very strongly, as a result of some of the very large contracts won in 2007 and in 2008. Alcatel-Lucent announced two large managed services contracts in the second quarter, including Reliance Communications in India and Sunrise in Switzerland.
- Network integration also enjoyed another quarter of very strong growth which was driven by several large and complex projects for the design, integration and optimisation of networks in Asia and North America.
- Growth in professional services - which includes the integration of software applications either from Alcatel-Lucent or third parties - was more moderate this quarter than in the first one, which is mainly due to a much more demanding comparison basis. For the first half, however, this business grew in the high single-digit range.
- Finally, Maintenance returned to growth this quarter, due to sustained growth in multivendor maintenance combined with an unusually strong quarter in legacy maintenance.
- The segment enjoyed a material improvement in profitability year-over-year, due to a very favourable mix, a material increase in the gross margin in Network operations, Network integration and Professional services and an overall better absorption of fixed costs.

Alcatel-Lucent will host an audio webcast at 1:00 p.m. CET, which can be accessed at http://www.alcatel-lucent.com/2q2008

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).

2008 Upcoming Events/ Announcements
October 30
Third quarter 2008 results

ALE Deutschland GmbH

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