Alcatel-Lucent sees recovery in selective markets while Q1 2010 results impacted by components shortage
Full-year 2010 outlook maintained
KEY NUMBERS FOR THE FIRST QUARTER 2010
• Revenues of Euro 3.247 billion, down 9.8% year-over-year and 8.2% at constant currency and perimeter
• Adjusted2 gross profit of Euro 1.058 billion or 32.6% of revenues
• Adjusted2 operating income1 of Euro (195) million or (6.0)% of revenues
• Operating cash flow3 of Euro 14 million
• Net (debt)/cash of 512 million as of March 31, 2010
Ben Verwaayen, CEO, commented:
“We are witnessing a recovery in the telecommunications equipment and related services market in some geographical areas especially North America. This recovery is driven by key technologies such as IP, terrestrial optics and WCDMA/LTE. With a solid position in all of these areas, Alcatel-Lucent is experiencing a strong increase in demand.
However, we were not able to fully satisfy customer demand for our products due to tightening components availability. This resulted in a weak financial performance this quarter, which does not reflect the overall underlying momentum within the company.”
“We are encouraged by the continued progress in cost management highlighted by the year-over-year increase of 110 basis points in gross margin and continued decrease in operating expenses. This will continue throughout the year.
With the strengthening demand in some segments and geographical areas combined with our actions in progress, we anticipate a strong sequential recovery in both our top-line and adjusted2 operating income1 and we are reaffirming our full year outlook.”
• First quarter revenue decreased 9.8% year-over-year and decreased 18.1% sequentially to Euro 3.247 billion. At constant currency exchange rates and perimeter, revenue decreased 8.2% year-over-year and decreased 20.9% sequentially. By operating segments, Networks saw a double-digit decline in revenue, partly attributable to a shortage of components in our supply chain. This has been particularly true in wireless access and terrestrial optics. Applications revenue declined 6.3% year-over-year with enterprise solutions & Genesys almost stable (slightly growing at constant currency). Services segment was more resilient with a 3.1% year-over-year decrease thanks to managed services and multivendor maintenance. From a geographic standpoint and at constant currency, year-over-year revenue grew at a single-digit rate in North America (+6%), declined at a single-digit rate in Europe (-9%) and at a double-digit rate in Asia Pacific (-19%) and in the rest of the world (-23%).
• Effective January 1st, 2010, we have changed our segment reporting as described in our 2009 Annual Report on Form 20-F. Carrier (now Networks) and Services segments have not changed. Our previous Enterprise segment revenues, adjusted for the sale of the motors & gears business, would have been Euro 241 million this quarter up 9.6% year-over-year; our previous Applications Software segment revenues would have been Euro 226 million down 11.4% year-over-year.
• First quarter adjusted2 operating income1 of Euro (195) million or (6.0)% of revenue. Adjusted2 gross margin came in at 32.6% of revenue for the quarter, compared to 31.5% in the year ago quarter and 36.7% in the fourth quarter 2009. The sequential decline in gross margin reflects the seasonal drop in volumes. The year-over-year increase was driven by ongoing initiatives to reduce fixed operations, procurement and product design costs that were partly offset by lower volumes. Operating expenses decreased 9.7% year-over-year, reflecting ongoing cost reduction plans.
• Net (debt)/cash of Euro 512 million, versus Euro 886 million as of December 31, 2009. The sequential decrease in net cash of Euro (374) million is due to the adjusted2 operating1 loss reported in the quarter combined with restructuring cash outlays of Euro (137) million and contribution to pensions and OPEB of Euro (44) million, partly offset by a decrease in operating working capital requirement of Euro 219 million. For the quarter, Alcatel-Lucent generated a positive operating cash flow3 of Euro 14 million.
• Funded status of Pensions and OPEB of Euro (617) million at the end of March, compared to Euro (985) million as of December 31, 2009. The sequential narrowing in the deficit mainly reflects the sequential return on plan assets. Changes in the discount rates used for pensions and post-retirement healthcare plans in the US, the euro zone and the UK had a negligible impact this quarter. From a regulatory perspective – which determines the funding requirements – the preliminary assessment of the company’s US plans suggest that no funding contribution should be required through at least 2011.
Alcatel-Lucent reiterates its outlook for 2010. While our supply chain is still experiencing capacity constraints, the demand for telecommunications equipment and related services is recovering due to booming data traffic and the need to increase network efficiency. Therefore:
• For 2010, Alcatel-Lucent continues to expect nominal growth (defined as between 0% and 5%) for the telecommunications equipment and related services market.
• For 2010, Alcatel-Lucent aims to reach an adjusted operating margin in the low to mid single-digit (defined as between 1% and 5%).
In the first quarter, the reported net loss (group share) was Euro (515) million or Euro (0.23) per diluted share (USD (0.31) per ADS), including the negative after tax impact from Purchase Price Allocation (PPA) entries in relation to the Lucent business combination of Euro (42) million.
In addition to the reported results, Alcatel-Lucent is providing adjusted results in order to provide meaningful comparable information, which exclude the main non-cash impacts from Purchase Price Allocation (PPA) entries in relation to the Lucent business combination. The first quarter 2010 adjusted2 net loss (group share) was Euro (473) million or Euro (0.21) per diluted share (USD (0.28) per ADS), which includes a restructuring charge of Euro (134) million, a net financial charge of Euro (46) million, an adjusted income tax charge of Euro (73) million mainly due to the 2010 U.S. Healthcare Legislation impact and minority interests of Euro 8 million.
For the first quarter 2010, revenues for the Networks segment were Euro 1.928 billion, a decrease of 13.1% compared to Euro 2.219 billion in the year-ago quarter and a decrease of 14.0% compared to Euro 2.242 billion in the fourth quarter 2009. At constant currency exchange rates, Networks revenues decreased 12.0% year-over-year and 17.7% sequentially. The segment posted an adjusted2 operating1 loss of Euro (128) million or an operating margin of (6.6) % compared to an operating loss of Euro (154) million or a margin of (6.9) % in the year ago period.
• Revenues for the IP division were Euro 272 million, a decrease of 5.6% from the year ago quarter, driven by the decline in MSWAN revenues due to continuing market contraction. IP/MPLS service routers revenues grew at a double digit rate from the year ago quarter thanks to strong momentum in North America & EMEA and good traction in IP/MPLS mobile backhaul with new wins announced with Verizon Wireless, Pannon and MTS Ukraine. In the field of strategic industries (formerly named verticals), Alcatel-Lucent announced the selection by the Norwegian National Rail Administration to deploy an advanced high-speed network based on IP/MPLS technology. Performance testing of the recently launched Wireless Packet Core offering for LTE and 3G networks confirms throughput in excess of 100 Gbps, an industry first paving the way for terabit capacities in mobile gateways.
• Revenues for the Optics division were Euro 567 million, a decrease of 13.7% from the year ago quarter. Terrestrial optics declined at a high teens rate. After a strong sequential growth and limited year-over-year decline in Q4 2009, the WDM segment confirmed its recovery this quarter with strong year-over-year growth driven by the Americas and APAC. Our next generation portfolio is gaining traction, including our microwave packet radio technology for backhauling and our Zero Touch Photonics technology as highlighted with the recent 5-year agreement with BT for an evolution of its 21CN. The Submarine business declined at a low single digit rate.
• Revenues for the Wireless division were Euro 819 million, a decrease of 10.5% from the year ago quarter. The WCDMA segment witnessed a strong growth year-over-year and sequentially driven primarily by the North American market, and the 3G CDMA (EVDO) segment experienced a sustained demand due to data traffic growth driven by the increased market penetration of smart-phones. This was offset by a decline in GSM & 2G CDMA revenues, in line with their corresponding market dynamics. Alcatel-Lucent announced several new LTE trials this quarter with SFR in France, Telecom Italia in Italy, STC in Saudi Arabia and MTS Ukraine, highlighting the good traction experienced by its LTE solution.
• Revenues for the Wireline division were Euro 298 million, a decrease of 24.2% from the year ago quarter. Legacy ADSL access and core switching drove the decline. Demand for VDSL2 technology remained solid while GPON continues to grow footprint with a recent win for ZON, a cable provider in Portugal. Our IMS solution continued to make gains with five new contract wins this quarter, including China Telecom for Shanghaï and Shandong province.
For the first quarter 2010, revenues for the Applications segment were Euro 416 million, a decrease of 6.3% compared to Euro 444 million in the year-ago quarter and a sequential decrease of 22.2% compared to Euro 535 million in the fourth quarter 2009. At constant currency exchange rates, Applications revenues decreased 4.4% year-over-year and decreased 25.1% sequentially. The segment posted an adjusted2 operating1 loss of Euro (27) million or an operating margin of (6.5)% compared to a loss of Euro (55) million or (12.4)% in the year-ago quarter.
• Network applications revenue declined in the mid teens mainly as a result of our decision taken in 2009 to refocus our product portfolio. In focus areas, applications professional services (i.e. software customization), remote customer management (Motive) and maintenance all combined continued to enjoy strong growth.
• Enterprise applications saw a stabilization this quarter: voice telephony was still impacted by weakness in corporate investment in Europe, data networking enjoyed a double-digit growth rate, driven by the success of the Omniswitch portfolio in Europe. Genesys, the contact centre software activity, grew slightly at constant currency exchange rates, in an overall subdued market for call center software.
• Adjusted2 operating1 margin in the first quarter benefited from the cost reduction actions and the impact of better volumes in Data networking.
For the first quarter 2010, revenues for the Services segment were Euro 772 million, a decrease of 3.1% compared to Euro 797 million in the year-ago quarter and a decrease of 25.0% compared to Euro 1 030 million in the fourth quarter 2009. At constant currency exchange rates, Services revenues decreased 4.5% year-over-year and decreased 27.8% sequentially. The segment reported an adjusted2 operating1 loss of Euro (40) million or (5.2)% of revenue compared to an adjusted2 operating1 loss of Euro (63) million or (7.9)% in the year ago period.
• Managed & Outsourcing Solutions revenue grew in the low teens this quarter, as it continued to benefit from the ramp-up of some of the large contracts won over the 2008/2009 period. Traction remains good with several wins announced: a 5-year agreement with BT for an evolution of its 21CN, the renewal of the existing managed services contract with Orange Austria for a 3-year period, the 5-year partnership with VIVACOM focusing on end-to-end strategic transformation of its fixed and mobile network throughout Bulgaria, the 10-year contract with the Federal Agency for Digital Radio of Security Authorities and Organisations in Germany.
• The Network and System Integration (N&SI) business declined slightly this quarter affected by the activity in network design, integration and optimization, but at a lower pace than the prior quarter.
• In the Network Build and Implementation (NBI) business, which focuses on civil works, revenues declined at a high teens rate, mainly reflecting a difficult comparison with very strong results in the year-ago quarter.
• Maintenance revenues declined at a low single digit rate driven by lower activity in maintenance contracts for Alcatel-Lucent products.
• The segment saw a year-over-year reduction of losses due to higher gross margins in maintenance that were partially offset by an unfavorable change in product mix across the services portfolio.
Alcatel-Lucent will host a press and analyst conference at its headquarters at 1:00 p.m. CET which can be followed through an audio webcast at http://www.alcatel-lucent.com/1q2010
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, litigations 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 next page for detailed information).
3- “Operating cash flow” is defined as cash provided (used) by operating activities a) after changes in working capital and other assets and liabilities b) before interest/tax paid, restructuring cash outlay and pension & OPEB cash outlay.
Alcatel-Lucent (Euronext Paris and NYSE: ALU) is the trusted transformation partner of service providers, enterprises, strategic industries such as defense, energy, healthcare, transportation, and governments worldwide, providing solutions to deliver voice, data and video communication services to end-users. A leader in fixed, mobile and converged broadband networking, IP and optics technologies, applications and services, Alcatel-Lucent leverages the unrivalled technical and scientific expertise of Bell Labs, one of the largest innovation powerhouses in the communications industry. With operations in more than 130 countries and the most experienced global services organization in the industry, Alcatel-Lucent is a local partner with a global reach. Alcatel-Lucent achieved revenues of Euro 15.2 billion in 2009 and is incorporated in France, with executive offices located in Paris. For more information, visit Alcatel-Lucent on the Internet: http://www.alcatel-lucent.com, read the latest posts on the Alcatel-Lucent blog http://www.alcatel-lucent.com/blog and follow us on Twitter: external linkhttp://twitter.com/Alcatel_Lucent.
Click here for the full press release in PDF (including reported and adjusted results, key figures and adjusted proforma results): http://www.alcatel-lucent.com/wps/DocumentStreamerServlet?LMSG_CABINET=Docs_and_Resource_Ctr&LMSG_CONTENT_FILE=Financial_Info/Fin_Releases/1Q10_PR-final_version_EN_6may2010.pdf
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