Alcatel-Lucent Reports Q1 667491

PARIS -- KEY NUMBERS FOR THE FIRST QUARTER 2009

• Revenues of Euro 3.598 billion, down 6.9% year-over-year
• Adjusted2 gross profit of Euro 1.133 billion or 31.5% of revenues
• Adjusted2 operating income1 of Euro (254) million or (7.1)% of revenues
• Operating cash flow3 of Euro (43) million
• Net debt of Euro (841) million as of March 31, 2009
• Full-year 2009 guidance to break-even at the adjusted operating income level reiterated

EXECUTIVE COMMENTARY

Ben Verwaayen, CEO, commented:

“This quarter was about putting together the new Alcatel-Lucent. I am pleased with the customer response to our new direction and strategy. Their confidence in our capabilities is strong,as illustrated by our recent wins in 3G and LTE as well as the encouraging increase in our order intake in both North America and Asia Pacific”.

“As we discussed before, 2009 will be a year of transition. We are reshaping the company and aggressively pursuing our product portfolio rationalization, co-sourcing, working capital management and SG&A reduction programs”.

“While expected, given seasonality and tough market conditions, we are not pleased with the operating loss incurred in the first quarter. Our guidance for the year remains unchanged and we are taking appropriate actions”.

KEY HIGHLIGHTS

• First quarter revenue decreased 6.9% year-over-year and 27.4% sequentially to Euro 3.598 billion. At constant currency exchange rates, revenue fell by 11.2% year-over-year and 28.3% sequentially, with a mixed performance among each of the four segments. On the one hand, Carrier and Enterprise revenues declined at double-digit rates year-over-year at constant currency, reflecting capital constraints in fixed and mobile access, switching and enterprise voice telephony, only partly offset by the growth in IP, W-CDMA and submarine optics. On the other hand, Applications software revenues grew at a mid-single digit rate at constant currency while Services revenues grew in the high teens. From a geographic standpoint, the decline is largely attributable to North America where revenues decreased 28% year-over-year at constant currency and to a lesser extent Asia Pacific (-8%), while Europe (-1.5%) and the rest of the world (+1%) showed good resilience.

• Adjusted operating income of Euro (254) million or (7.1%) of revenue. Adjusted gross margin came in at 31.5% of revenue for the quarter, down from 36.2% in the year ago quarter and 33.3% in the fourth quarter 2008. Both the year-over-year and sequential declines in gross margin were largely driven by volumes and the product/geographic mix. The year-over-year decline was also impacted by the recovery of the US dollar as well as the non recurrence of the hedging gain booked in the year ago quarter (90bp impact on the gross margin). Operating expenses were up slightly year-over-year and sequentially, reflecting the strong reduction in R&D capitalization, the non recurrence of the one time items (sale of patents) booked in both the first quarter 2008 and in the fourth quarter 2008 and finally (on a year-over-year basis only), the recovery of the US dollar. Excluding the impact of capitalization and one time items, gross R&D expenses were flat year over year and up 3.3% sequentially. SG&A expenses fell 3.7% year-over-year and 4.7% sequentially.

• Net debt of Euro (841) million, versus Euro (389) million as of December 31, 2008. The sequential increase in net debt of Euro (452) million primarily reflects the adjusted operating loss reported in the quarter, interest expenses of Euro (75)million, restructuring cash outlays of Euro (178) million and contribution to Pensions and OPEB of Euro (50) million. Effective January 1st 2009, operating cash flow (now defined as cash generated from operations after changes in working capital but before interest/tax paid, restructuring cash outlay and pension & OPEB outlay) has been introduced as a key metric for management compensation. For the quarter, the operating cash flow was Euro (43) million, compared to Euro 131 million in the first quarter 2008 and Euro 663 million in the fourth quarter 2008.

• Material debt repayment carried out in the first quarter. Alcatel-Lucent paid-off the 4.375% bond due February 2009 for a nominal value of Euro 777 million. The company repurchased at a substantial discount USD 99 million (nominal value) of the Lucent 7.75% USD convertible bond due March 2017. With cash and marketable securities of Euro 3.34 billion as of March 31st 2009, the imminent sale of its stake in Thales and a Euro 1.4 billion credit line, Alcatel-Lucent remains adequately funded.

• Funded status of Pensions and OPEB of Euro (545) million at end March, compared to Euro (429) million as of December 31, 2008. This slight sequential widening of the deficit mainly reflects a decline in plan assets, almost offset by the reduction in the net present value of benefit obligations due to an increase in the discount rate for US pensions. The final assessment of private equity and real estate assets as of December 31, 2008 confirmed that all large US plans remained overfunded from an ERISA perspective at the end of last year. Alcatel-Lucent thus reiterates its earlier statement that it does not expect any funding contribution through 2010.

Alcatel-Lucent (NYSE: ALU)