Lucent Technologies Reports Results for the Second Quarter of Fiscal 2006
» Records net income of $181 million, or 4 cents per diluted share
» Posts revenues of $2.14 billion
APRIL 25, 2006 MURRAY HILL, N.J. — Lucent Technologies (NYSE: LU) today reported results for the second quarter of fiscal 2006, which ended March 31, 2006, in accordance with U.S. generally accepted accounting principles (GAAP). For the quarter, Lucent reported net income of $181 million, or 4 cents per diluted share. These results compare with a net loss of $104 million, or 2 cents per share, in the first quarter of fiscal 2006, and net income of $267 million, or 6 cents per diluted share, in the year-ago quarter.
In the prior quarter ended Dec. 31, 2005, net income was negatively impacted by a charge of $278 million, or about 6 cents per share, for a bankruptcy court judgment related to litigation between Lucent and the trustee for Winstar Communications. The judgment is currently under appeal in the U.S. District Court in Delaware. In the year ago quarter, net income was positively impacted by $119 million, or about 2 cents per diluted share, related to tax items and certain other significant items. Similar items did not have a material impact on the second quarter’s net income.1
The company reported revenues of $2.14 billion in the quarter, an increase of 4 percent sequentially and a decrease of 8 percent from the year-ago quarter. The company’s revenues were $2.05 billion in the first quarter of fiscal 2006 and $2.34 billion in the year-ago quarter.
“As our second quarter came to a close in March, we opened a new chapter for Lucent with the announcement of a definitive merger agreement with Alcatel on April 2,” said Lucent Technologies Chairman and CEO Patricia Russo. “We are excited by the opportunity to merge our businesses to create the world’s leading communications solutions provider. The combined company will be truly global in scale, have clear leadership in areas defining next-generation networks and services, and have one of the largest R&D capabilities in the industry at a time when innovation is increasingly important to our customers. Our integration planning has begun and we are on track to complete this merger in the next six to 12 months.
“Turning to our second quarter results, we reported a strong gross margin of 43 percent and operating margin of 12 percent,” said Russo. “Our revenues increased modestly on a sequential basis, resulting from a measured pace of growth in some of the markets in which we participate, particularly in North America where we have seen slower-than-anticipated wireless deployments.
“Although our North American revenues for the first half of fiscal 2006 are slightly below the year-ago period, the fundamentals of the business remain solid. We expect wireless deployments in North America to build through the remainder of the year, with an acceleration in the fourth fiscal quarter around UMTS and EVDO Rev A deployments,” said Russo. “We continue to expect growth across our portfolio in the Caribbean and Latin America region during the second half of the fiscal year, and we expect a ramp-up in network transformation projects in Europe as well. Offsetting these favorable trends, however, we expect a $500 million revenue decline in China and India for this fiscal year, driven primarily by declines in PHS sales and delays in the issuance of 3G licenses in China, and to a lesser extent our selective participation in highly competitive market opportunities in India,” concluded Russo.
Lucent Technologies Chief Financial Officer John Kritzmacher said, “The ramp-up in spending is occurring more slowly than we anticipated. While we continue to expect revenues in the second half of fiscal 2006 to improve significantly over the first half, we now expect annual revenues for fiscal 2006 to be down year over year. Given the pending merger with Alcatel, we are discontinuing our practice of providing specific annual guidance.2 We will continue to focus on improving our operational performance as we prepare for successful integration with our merger partner.”
GROSS MARGIN AND OPERATING EXPENSES
Gross margin for the second quarter of fiscal 2006 was 43 percent of revenues as compared with 42 percent in the first quarter of fiscal 2006 and 42 percent in the year-ago quarter.
Operating expenses for the second quarter of fiscal 2006 were $677 million as compared with $940 million for the first quarter of fiscal 2006, which included a $278 million charge related to the judgment in the Winstar litigation, and $707 million in the year-ago quarter.
The net pension and postretirement benefit credit for the second quarter was $114 million, compared with $104 million in the first quarter of fiscal 2006 and $180 million in the year-ago quarter.
BALANCE SHEET UPDATE
As of March 31, 2006, Lucent had $4.0 billion in cash and marketable securities, a decrease of $411 million from the quarter ended December 31, 2005. The decrease was primarily driven by $311 million of cash used to collateralize a letter of credit issued in connection with the Winstar judgment and $80 million in payments for certain legal settlements that also had been previously accrued.
REVIEW OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2006
On a sequential basis, revenues in the United States increased 11 percent to $1.5 billion, and revenues outside the United States decreased 9 percent to $642 million. Compared with the year-ago quarter, U.S. revenues increased by 3 percent and revenues outside the United States decreased by 28 percent, with approximately two-thirds of that decline related to the aforementioned challenges in China and India.
Lucent’s segment structure is organized around its respective products and services. The reportable segments are as follows:
* Mobility Access and Applications Solutions, which includes CDMA, UMTS, WiMax and applications.
* Multimedia Network Solutions, which includes optical, access and data networking.
* Converged Core Solutions, which includes both legacy voice and next-generation IMS/VoIP core products.
* Services, which includes maintenance, deployment and network transformation services such as professional and managed services, as well as network operations software.
Revenues and operating income for these segments are included in Exhibit D in the accompanying financial reporting package.
SECOND FISCAL QUARTER 2006 HIGHLIGHTS
Lucent made several significant announcements in the second fiscal quarter related to key technologies for next-generation networks, including: 3G mobile networks, IMS, VoIP, services, next-generation data and optical solutions, broadband access, and applications.
3G Mobile Networks: Lucent continued the momentum of its third-generation (3G) mobile networking solutions:
* Lucent unveiled the Lucent Base Station Router (BSR), a groundbreaking Bell Labs innovation that combines a base station, radio network controller and core network router functionalities into one element, dramatically simplifying and reducing the cost of operating IP-based mobile networks. O2 is currently conducting laboratory trials of the Lucent BSR in Germany. In addition, the BSR was recently selected as the first place winner of a CTIA WIRELESS 2006 Wireless Emerging Technologies (E-tech) Award in the category of “Most Innovative In-Building Solution.”
* Cingular expanded the market coverage of Lucent’s existing agreement to supply 3G UMTS (Universal Mobile Telecommunications System) network equipment. The expansion will include both Radio Access Network and core switching, along with software and services, and an enhanced version of UMTS technology, called High-Speed Downlink Packet Access (HSDPA).
IMS/VoIP: Lucent continued to lay the foundation for offering advanced multimedia communication services for consumer and enterprise customers.
* Lucent and IBM announced that they will develop, market and deliver joint solutions based on Internet Protocol Multimedia Subsystems (IMS) protocol that will accelerate the introduction of new blended services for wireless and wireline carriers. The joint architecture can reduce service providers’ capital and operating expenses as well as enable them to deliver new revenue producing services.
* Brasil Telecom, one of the largest broadband service providers in Latin America, selected Lucent to deploy elements of its IMS solution for networks in the Curitiba, São Paulo and Brasília regions.
Services: Lucent network integration, hosted and services solutions were components of 12 contracts announced around the world during the second quarter, including:
* A contract with Sprint to provide network hosted VoIP services to its enterprise customers worldwide.
* A contract with the European Commission, Directorate General Information Society and Media, to provide a comprehensive analysis of the factors influencing the availability of Europe’s electronic communications infrastructure, including its Internet and mobile networks.
* In Asia, a managed services agreement with Pacific Crossing Limited to help operate their undersea communications link between the United States and Japan, and a multivendor maintenance services contract with Hanaro Telecom, Korea’s second largest wireline and broadband operator.
Next-generation data and optical, and broadband access: Lucent announced an agreement to purchase certain assets of Riverstone Networks, a maker of Ethernet routers. The acquisition, which is expected to close in the third fiscal quarter, would enhance Lucent’s ability to deliver large-scale Ethernet solutions and would allow it to accelerate the development of next-generation, carrier-grade Ethernet solutions that enable customers to deliver broadband services to businesses and residential subscribers.
* Lucent was awarded a prime contract with the U.S. Army worth up to $94 million to provide network integration services, as well as its Metropolis® Wavelength Services Manager optical networking platform and software, creating a multi-country U.S. Army high-speed optical network.
* Lucent and T-Com have renewed their existing agreements for T-Com’s optical transport network. Under the new agreements – which span a period of two years – Lucent will continue to supply leading-edge optical networking technology from its SDH and DWDM portfolio, will provide upgrades to its multi-vendor network management solution, and services support.
Applications: Lucent continued to show its expertise in next-generation applications for the delivery of communications services that end users demand. During the quarter, Lucent announced that it is supplying vistream, the first German Mobile Virtual Network Enabler, with an advanced network and real-time rating and charging solution for voice and data services, including the MiLife® Application Server and MiLife® SurePay® application, both of which are elements in Lucent’s IP Multimedia Subsystem (IMS) solution. Lucent is also providing network and application integration services to vistream.
The quarterly earnings conference call will take place today at 8:30 a.m. EDT and be broadcast live over the Internet at http://www.lucent.com/investor. It will be maintained on the site for replay through Tuesday, May 2, 2006.
Lucent Technologies designs and delivers the systems, services and software that drive next-generation communications networks. Backed by Bell Labs research and development, Lucent uses its strengths in mobility, optical, software, data and voice networking technologies, as well as services, to create new revenue-generating opportunities for its customers, while enabling them to quickly deploy and better manage their networks. Lucent’s customer base includes communications service providers, governments and enterprises worldwide. For more information on Lucent Technologies, which has headquarters in Murray Hill, N.J., USA, visit www.lucent.com.
1 Details on the significant items impacting results are available in Exhibit E in the accompanying financial reporting package.
2 Prior specific annual guidance will no longer be updated and should be disregarded.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
This press release contains statements regarding future performance, events or developments, including the proposed transaction between Lucent and Alcatel, the expected timetable for completing the proposed transaction and other statements about Lucent managements’ future expectations, beliefs, goals, plans or prospects that are based on current expectations, estimates, forecasts and projections about Lucent, as well as Lucent’s future performance and the industries in which it operates, in addition to managements’ assumptions. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements which are not statements of historical facts. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties are based upon a number of important factors including, among others: our ability to operate effectively in a highly competitive industry with many participants; our ability to keep pace with technological advances and correctly identify and invest in the technologies that become commercially accepted; our reliance on a small number of key customers; the ability to consummate the proposed transaction with Alcatel; difficulties and delays in achieving synergies and cost savings; potential difficulties in meeting conditions set forth in the definitive merger agreement entered into by Lucent; fluctuations in the telecommunications market; the pricing, cost and other risks inherent in long-term sales agreements; exposure to the credit risk of customers; reliance on a limited number of contract manufacturers to supply products we sell; the social, political and economic risks of our global operations; the costs and risks associated with pension and postretirement benefit obligations; the complexity of products sold; changes to existing regulations or technical standards; existing and future litigation; difficulties and costs in protecting intellectual property rights and exposure to infringement claims by others; and compliance with environmental, health and safety laws. For a more complete list and description of such risks and uncertainties, refer to Lucent’s Form 10-K for the year ended September 30, 2005 as well as other filings by Lucent with the US Securities and Exchange Commission (the “SEC”). Except as required under the US federal securities laws and the rules and regulations of the SEC, we disclaim any intention or obligation to update any forward-looking statements after the distribution of this press release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.
IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC
In connection with the proposed transaction, Alcatel and Lucent intend to file relevant materials with the SEC, including the filing by Alcatel with the SEC of a Registration Statement on Form F-6 and a Registration Statement on Form F-4 (collectively, the “Registration Statements”), which will include a preliminary prospectus and related materials to register the Alcatel American Depositary Shares (“ADS”), as well as the Alcatel ordinary shares underlying such Alcatel ADSs, to be issued in exchange for Lucent common shares, and Lucent and Alcatel plan to file with the SEC and mail to their respective stockholders a Proxy Statement/Prospectus relating to the proposed transaction. The Registration Statements and the Proxy Statement/Prospectus will contain important information about Lucent, Alcatel, the transaction and related matters. Investors and security holders are urged to read the Registration Statements and the Proxy Statement/Prospectus carefully when they are available. Investors and security holders will be able to obtain free copies of the Registration Statements and the Proxy Statement/Prospectus and other documents filed with the SEC by Lucent and Alcatel through the web site maintained by the SEC at www.sec.gov. In addition, investors and security holders will be able to obtain free copies of the Registration Statements and the Proxy Statement/Prospectus when they become available from Lucent by contacting Investor Relations at www.lucent.com, by mail to 600 Mountain Avenue, Murray Hill, New Jersey 07974 or by telephone at 908-582-8500 and from Alcatel by contacting Investor Relations at www.alcatel.com, by mail to 54, rue La Boétie, 75008 Paris, France or by telephone at 33-1-40-76-10-10.
Lucent and its directors and executive officers also may be deemed to be participants in the solicitation of proxies from the stockholders of Lucent in connection with the transaction described herein. Information regarding the special interests of these directors and executive officers in the transaction described herein will be included in the Proxy Statement/Prospectus described above. Additional information regarding these directors and executive officers is also included in Lucent’s proxy statement for its 2006 Annual Meeting of Stockholders, which was filed with the SEC on or about January 3, 2006. This document is available free of charge at the SEC’s web site at www.sec.gov and from Lucent by contacting Investor Relations at www.lucent.com, by mail to 600 Mountain Avenue, Murray Hill, New Jersey 07974 or by telephone at 908-582-8500.
Alcatel and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of Lucent in connection with the transaction described herein. Information regarding the special interests of these directors and executive officers in the transaction described herein will be included in the Proxy Statement/Prospectus described above. Additional information regarding these directors and executive officers is also included in Alcatel’s Form 20-F filed with the SEC on March 31, 2006. This document is available free of charge at the SEC’s web site at www.sec.gov and from Alcatel by contacting Investor Relations at www.alcatel.com, by mail to 54, rue La Boétie, 75008 Paris, France or by telephone at 33-1-40-76-10-10.
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