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Alcatel Reports Q2

Alcatel reports revenues up 7.6% year over year to €3.38B; provides update on merger with Lucent

July 27, 2006

3 Min Read

PARIS -- Alcatel's (Paris: CGEP.PA and NYSE: ALA) Board of Directors reviewed and approved second quarter 2006 results. Revenues were up by 7.6% at Euro 3,384 million compared with Euro 3,145 million (up 7.3% at constant Euro/USD exchange rate) in the same period last year. The gross margin was 33.6%. Operating profit amounted to Euro 263 million, a 7.8% operating margin, and included a Euro 12 million impact from a capital gain resulting from disposal of fixed assets. Net income (group share) for the quarter was registered at Euro 180 million or a diluted EPS of Euro 0.13 per share (USD 0.17 per ADS), (Euro 0.12 per share, excluding capital gains) which compared with a diluted EPS in second quarter 2005 of Euro 0.14 (Euro 0.09 per share, excluding capital gains).

Serge Tchuruk, Chairman and CEO, summarized the Board's observations:

"While preparing for the merger with Lucent Technologies and the Thales transaction, Alcatel achieved good revenue growth in the second quarter, above market rate. Our strong performance in the wireline segment confirmed Alcatel's leading position in the network transformation to an all-IP infrastructure to support triple play services. We are particularly pleased with the resulting 4-fold year over year revenue increase in IP routing and aggregation as well as our strong position in the DSL and fiber access markets. With the industry consolidation gaining momentum, the wireless market environment becomes even more competitive as some players are aggressively trying to reposition themselves. In this context, we remained deliberately selective in addressing contract opportunities involving mature technologies. At the same time we continued to invest in key future wireless technologies and applications to develop a leading position in next generation networks. The forthcoming Lucent merger will bring added scale into related R&D programs.

We were particularly satisfied with the strong quarter in North America where we registered a 40% growth (USD), driven by a strong demand for triple play services, and with our activity in China, which saw more than a 20% increase (USD), with significant strength in wireless.

Going into the second half of the year we expect to see the carrier market growing in the mid single digit range for full year 2006. As we expect the pending merger with Lucent Technologies to close during the fourth quarter, we are not providing specific annual guidance. We are also working on the Thales transaction which is targeted to close before year-end.

Our third quarter will be a transition quarter where we expect revenues to grow year over year in the mid single digit range (at the current structure). The operating profit should be close to the same amount as in the second quarter of 2006, taking into account increased investments in R&D and additional costs associated with the strategic moves underway.

Together with Lucent Technologies as a combined company, we are comfortable in our ability to achieve the targeted Euro 1.4 billion in cost synergies, which should translate into significantly improved profitability for the future. Furthermore, this transaction will give us the economies of scale needed in all R&D areas and will position the company to capitalize on the trend towards converged networks, which we believe will drive the carrier market".

MERGER UPDATE

On July 24, 2006, the European Commission informed Alcatel and Lucent Technologies that their proposed merger complies with the European Union's competition rules and that the two companies have its approval to merge. As announced on July 10, 2006, the companies believe they are currently on track to complete their merger transaction by the end of calendar year 2006.

Alcatel (NYSE: ALA; Paris: CGEP:PA)

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