Alcatel-Lucent’s Board of Directors (Euronext Paris and NYSE: ALU) reviewed and approved reported results for the second quarter 2007.
EXECUTIVE COMMENTARY
Patricia Russo, CEO commented: “This quarter, our revenues sequentially grew by a solid 13% at a constant Euro/USD exchange rate, with the strongest performance in the wireline and services businesses. From a regional perspective, we saw strong growth in Asia Pacific. We are seeing the benefits of the merger with momentum building in our order flow for the second consecutive quarter. As a result, our order backlog at the end of the second quarter 2007 continues to improve compared to first quarter 2007. We are also seeing the benefits of revenue synergies through the combined company’s strengths. For example, Reliance Communications selected us for both their GSM and CDMA network expansions, marking our entry into the GSM portion of Reliance’s network and we have also been selected by Telecom New Zealand to deploy our W-CDMA technology, along with our existing CDMA contract.
As we have said, 2007 is clearly a transition year for the company as we continue to execute on our integration plans in a rapidly changing industry. During the quarter, we reduced our cost structure, in areas such as IS/IT and R&D. Additionally, we reduced approximately 1,900 positions, before the impact of new managed services contracts and acquisitions (approximately 400 positions) are taken into account. Year to date we have reduced headcount by 3,800 people which is 30% of the 3-year 12,500 target. Again, this is before the impact of managed services contracts and acquisitions. Based on this progress and the ongoing efforts underway, we are planning to achieve our synergy related pre-tax savings of Euro 600 million this year. However during 2007, we are strategically reinvesting our gross margin savings to position the company for the long term, while achieving most of our operating expense savings on a comparable basis.
In the second quarter 2007, the gross margin was lower than we would have liked and was negatively impacted by continued significant investments in key markets, an unfavorable product and geographic mix as well as some impact from product related transition costs as customers migrate their networks. We believe the gross margin level this quarter is not indicative of the business going forward.
Finally, we anticipate sequential revenue growth as the year progresses, which implies a strong ramp-up in the second half 2007. Looking forward to the full year 2007, we continue to expect revenues to increase on a percentage basis at the carrier market growth rate of mid single digits at a constant Euro/USD exchange rate.”
REPORTED RESULTS
In accordance with regulatory reporting requirements, the second 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 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 second quarter 2007 results.
For the second quarter 2007, Alcatel-Lucent’s reported revenues amounted to Euro 4,326 million. The reported gross profit was Euro 1,397 million, including the impacts from purchase price allocation entries of Euro (50) million. Reported operating income (loss)(1) was Euro (206) million, including the impact from purchase price allocation entries of Euro (187) million. For the quarter, reported net income (group share) was Euro (586) million or Euro (0.26) per diluted share (USD (0.35) per ADS), including the impact from purchase price allocation entries of Euro (250) 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 second quarter 2007 results. Prior period results refer to the adjusted pro forma combined operations for Alcatel-Lucent as of January 1, 2006.
For the second quarter, Alcatel-Lucent’s revenues were Euro 4,326 million, compared to a pro-forma Euro 4,491 million in the year-ago quarter, a 0.5% increase at a constant Euro/USD exchange rate, or a 4% decline at current rate. The adjusted gross profit was Euro 1,447 million, 33.4% of sales, including a positive impact of Euro 34 million from a litigation settlement, compared to an adjusted pro-forma gross profit of Euro 1,711 million in the year-ago quarter. Adjusted operating income (loss)(2) was Euro (19) million, (0.4)% of sales, compared with an adjusted pro-forma operating income (loss) of Euro 252 million in the year-ago quarter. For the quarter, adjusted net income (group share) was Euro (336) million, or Euro (0.15) per diluted share (USD (0.20) per ADS). The adjusted pro-forma net income (group share) was Euro 302 million, or Euro 0.13 per diluted share (USD 0.18 per ADS), in the second quarter 2006.
The adjusted net income (group share) for the second quarter 2007 included three significant items:
a positive pre & post-tax impact of Euro 42 million from a litigation settlement,
a positive pre-tax impact of Euro 265 million, or post-tax of Euro 80 million, reflecting an amendment of the OPEB liabilities,
a negative pre and post-tax impact Euro (298) million from a one-time impairment charge related to W-CDMA assets following our annual impairment assessment of each business division’s assets;
Together all three items total Euro (176) million or Euro (0.08) per diluted share (USD (0.11) per ADS).
The net (debt)/cash position was Euro 221 million as of June 30, 2007, compared with Euro (48) million as of March 31, 2007. -Alcatel-Lucent
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