Alcatel Sales Grow, Profit FallsAlcatel Sales Grow, Profit Falls

PARIS -- First quarter highlights:

Alcatel's Board of Directors (Paris: CGEP.PA and NYSE: ALA) reviewed and approved first quarter 2005 results, which reflect the transition to IFRS (International Financial Reporting Standards). Consolidated revenues in the first quarter amounted to Euro 2,607 million, an increase of 3.7% at a current Euro/USD exchange rate (an increase of 6.1 % at a constant Euro/USD exchange rate). The gross margin was registered at 36.4%, after a negative impact of 0.8% of revenues coming from bid hedging, as now registered under IFRS. The gross margin was above both the first and last quarter of 2004. Operating profit amounted to Euro 107 million, representing a 4.1% operating margin and a 27% increase over the same period last year. This amount also includes the negative impact of bid hedging. R&D capitalization accounted for 0.8% of revenues compared to 1.5% in the first quarter of 2004. Net income amounted to Euro 124 million, or a diluted EPS of Euro 0.09 (USD 0.12 per ADS), and includes a Euro 69 million capital gain from the Nexans' share disposal.

Net cash amounted to Euro 304 million, resulting from a reduced level of factoring of accounts receivables and an increase in inventories in line with the order backlog.

Note: All historical results are restated for optical fiber, mobile handsets, and power systems.

Table 1:

*E/ADS has been calculated using the US Federal Reserve Bank of New York noon euro/dollar buying rate of USD1.30 as of March 31, 2005.

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

"First quarter results and business trends substantiate the assumptions underlying our full year outlook which is unchanged and which includes a 10%+ operating margin target. In a very competitive market environment, Alcatel registered the best operating margin ever in a traditional seasonally low first quarter. Our profitability essentially rests on two elements. The first is our capability to withstand pricing pressures by optimizing product architectures and sourcing and by containing fixed expenses, without jeopardizing business development opportunities. First quarter margins and cost trends make us confident that we can achieve our targets through the year. Bid hedging may however result in quarterly margin variability, as was the case during the first quarter.

With unit margins under control, the second challenge is clearly to expand revenues in a market undergoing a deep transformation. This objective requires development investments to differentiate from competition by the strength of product offerings and marketing policies. There, the very positive trend of our first quarter order intake confirms the success of this strategy. It is based on the promotion not only of disruptive technologies in IP edge, optics, mobile NGN and applications, but also on the growing traction in our end-to-end solutions where we partner with a number of key customers, particularly in triple play projects which combine voice, data and video. In vertical markets, where mission critical systems such as security and safety become predominant drivers, Alcatel's positions continue to expand at a double-digit rate, particularly in transport, energy and the public sector.

In the fixed line business, we confirm our expectations of a rebound in the second half, following a second quarter which will continue to be weak. This rebound should materialize as triple play generated revenues more than offset the decline in traditional products, leading to stable revenues for the full year. The first quarter book to bill registering exceptionally high levels is indicative of this underlying momentum. In fact, we clearly are the number one in the world in triple play which is the primary source of future revenues for carriers. We are now active in sixty major accounts throughout the world.

In our wireless business, we registered a high revenue growth of 28% fueled by networks and applications and made strong market share advances. During the first quarter, the operating margin was impacted by product launching costs associated with our NGN core solution and an unfavorable geographical mix of the business. We expect strong revenue growth to continue in the second quarter, with a return to double-digit operating margins. In the private sector, we saw strong momentum in the vertical markets offset by the weak satellite business, particularly in commercial telecoms, and a soft enterprise market."

Outlook

"We anticipate a low to mid single digit growth rate in revenues year over year for the second quarter as well as for full year 2005 at a constant Euro/USD exchange rate. Earnings per share should grow at a double digit rate for the full year."

Alcatel