Lucent Technologies Reports Results for the Fourth Quarter and Fiscal Year 2006
» Reports revenues of $2.56 billion for the quarter
» Posts net income of $371 million, or 7 cents per diluted share, for the quarter
» For fiscal year 2006, posts revenues of $8.80 billion and net income of $527 million
OCTOBER 24, 2006 - MURRAY HILL, N.J. — Lucent Technologies (NYSE: LU) today reported results for the fourth quarter and fiscal year 2006, which ended Sept. 30, 2006, in accordance with U.S. generally accepted accounting principles (GAAP). For the quarter, Lucent reported net income of $371 million or 7 cents per diluted share. These results compare with net income of $79 million or 2 cents per diluted share in the third quarter of fiscal 2006, and net income of $372 million or 7 cents per diluted share in the year-ago quarter.
The company reported revenues of $2.56 billion in the quarter, an increase of 25 percent sequentially and an increase of 5 percent from the year-ago quarter. The company’s revenues were $2.05 billion in the third quarter of fiscal 2006 and $2.43 billion in the year-ago quarter.
The fourth quarter’s earnings per share included a positive impact of $73 million, or about 1 cent per diluted share, for discrete tax items and the reversal of U.S. deferred taxes. Similar items did not have a material impact in quarter ended June 30, 2006. In the year-ago quarter, earnings per share included a positive impact of $128 million, or about 2 cents per diluted share, primarily due to income tax items.1
For the fiscal year, Lucent reported revenues of $8.80 billion, a decrease of 7 percent compared with $9.44 billion in revenues for fiscal 2005. The net income for fiscal 2006 was $527 million or 11 cents per diluted share compared with net income of $1.19 billion or 24 cents per diluted share in fiscal 2005. Significant items previously identified in our quarterly earnings releases had a negative impact of $247 million, or about 5 cents per diluted share, on net income in fiscal 2006, and a positive impact of about $352 million, or about 7 cents per diluted share, on net income in fiscal 2005. The significant items included, among other things, two significant litigation charges related to the Winstar judgment and the shareowner settlement, as well as benefits from certain discrete tax items and recoveries of bad debt and customer financing.1
“We are pleased to have ended what’s been a challenging year with a strong quarter. As anticipated, we posted our highest quarterly revenue period for the year, driven primarily by mobility deployments in North America, and we recorded a gross margin of 44 percent,” said Lucent Technologies Chairman and CEO Patricia Russo.
“In addition to the rollout of our EV-DO Rev A and HSDPA solutions during the quarter, we also continued to convert IMS trials into contracts, announcing that KPN, The Netherlands’ largest service provider, had selected Lucent’s IP Multimedia Subsystem solution (IMS) to replace its legacy public switched-network. Lucent Worldwide Services, was also chosen as the prime integrator for the migration to KPN’s All-IP network,” added Russo.
“During the fiscal year, we added 6 customers for our IMS portfolio, announced more than 70 contracts in 25 countries, and saw revenue growth in UMTS, professional services, data, optical and applications,” said Russo. “We also continued to lead the market in CDMA, including the introduction of EV-DO Rev A to support next-generation services.”
“In fiscal 2006, we essentially maintained our annual U.S. revenue level, given our improved revenue performance in the fourth quarter,” said Lucent Technologies Chief Financial Officer John Kritzmacher. “Outside the U.S., our annual revenues decreased by about $600 million, and as expected, roughly $500 million of the decrease came from the combined revenues for China and to a lesser extent India. Notwithstanding the fiscal 2006 revenue decline, we achieved an annual gross margin rate of 42 percent and continued to invest in the areas that are critical to our vision of next-generation networks.”
Given the company’s pending merger transaction with Alcatel, it is continuing its practice of not providing specific quarterly or annual guidance.
On September 7, 2006, shareholders of Alcatel and Lucent approved the proposed merger agreement. The companies continue to believe they are on track to complete their merger transaction by the end of calendar year 2006.
“With another key milestone behind us following the successful shareholder votes, we are moving closer to the integration of our two companies. We continue to make excellent progress on our integration planning to ensure a smooth transition from Day 1,” said Russo. “We look forward to the successful closure of the merger transaction.”
GROSS MARGIN AND OPERATING EXPENSES
Gross margin for the fourth quarter of fiscal 2006 was 44 percent of revenues as compared with 41 percent in the third quarter of fiscal 2006 and 46 percent in the year-ago quarter. For the fiscal year, gross margin was 42 percent as compared with 44 percent for fiscal 2005.
Operating expenses for the fourth quarter of fiscal 2006 were $739 million as compared with $665 million for the third quarter of fiscal 2006 and $810 million in the year-ago quarter. For the fiscal year, operating expenses were $3.02 billion as compared with $2.86 billion for fiscal 2005.
Gross margin and operating expenses for fiscal 2006 reflect a total reduction of approximately $300 million in annual and long-term employee incentive awards as compared with fiscal 2005.
The net pension and postretirement benefit credit for the fourth quarter was $107 million, compared with $104 million in the third quarter of fiscal 2006 and $185 million in the year-ago quarter. For the fiscal year, the net pension and postretirement credit was $429 million as compared with $718 million for fiscal 2005.
BALANCE SHEET UPDATE
As of September 30, 2006, Lucent had $3.4 billion in cash and marketable securities, a decrease of $254 million from the quarter ended June 30, 2006. The decrease was driven by the $368 million repayment of certain debt obligations in July.
REVIEW OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2006
On a sequential basis, revenues in the United States increased 40 percent to $1.77 billion, and revenues outside the United States increased 1 percent to $789 million. Compared with the year-ago quarter, U.S. revenues increased by 17 percent and revenues outside the U.S. decreased by 14 percent.
Revenues and operating income for Lucent’s segments are included in Exhibit D in the accompanying financial reporting package.
Lucent continued to make announcements related to key technologies for next-generation networks, including: IMS, VoIP, 3G mobile networks, services, next-generation optical solutions, broadband access and applications.
IMS/VoIP: Lucent made further market progress for its advanced multimedia networking solutions and announced agreements with:
* KPN to supply our IMS solution, which will replace its legacy network while supporting both new and existing services.
* Manx Telecom, a subsidiary of O2, to expand its IMS-based converged network for VoIP, data and video services.
* Vodafone Italy to provide an intelligent network solution for its “Vodafone Casa” service, enabling customers to use mobile phones as home phones and mobile devices.
3G Mobile Networks: Lucent continued to build on its momentum in (3G) mobile networking solutions.
* Just last week, Sprint selected Lucent to develop software and infrastructure necessary to enable push-to-talk services on its CDMA2000 1xEV-DO Rev A network. Lucent Services will provide network integration, program management, testing operational readiness and deployment services.
* Sky Link, the largest CDMA450 operator in Russia and Commonwealth of Independent States (CIS), chose Lucent to upgrade existing Lucent -supplied base stations with CDMA2000 1xEV-DO technology.
Services: Lucent’s network transformation, network integration and other services solutions were components of 10 contracts announced around the world during the quarter.
* Lucent signed a network integration and program management contract with KPN to manage the deployment and integration of its All IP network.
* Manx Telecom selected Lucent to provide network installation, design, integration and migration services, and VitalSuite® network management products for its next-generation converged fixed/mobile network.
* Lucent was chosen, as part of a Boeing-led team awarded a secure border contract by the Department of Homeland Security, to provide R&D, technical and services expertise in wireless, network integration, and security.
* In October, Lucent announced an agreement with VIVO, the largest mobile operator in the Southern Hemisphere, to provide technical support and maintenance services for its 3G CDMA2000 1X and 1xEV-DO network.
Next-generation optical, broadband access and applications: Lucent made significant progress in IPTV, demonstrated its expertise in next-generation applications for the delivery of communications services, and delivered its next-generation networking portfolio
* Japan’s NTTPC deployed Lucent’s Metropolis® Wavelength Services Manager (WSM) throughout its network in Tokyo, increasing network capacity to support IP-based services.
* Lucent announced that it would acquire Mobilitec, a leading provider of content management software for wireless service providers, to enable service providers to offer personalized content for mobile and broadband subscribers.
* Updata, a broadband solutions provider in the U.K., selected the Lucent Ethernet Router 15100 -- from Riverstone Networks -- to support high-speed data services for local government customers in the U.K. And in October, Telefonica selected the Ethernet Router 15800 to support growth for its “Imagenio” IPTV service.
* Just this month, Lucent unveiled MiViewTV™, a comprehensive IPTV software suite, enabling operators to offer next-generation services available anytime, on any device.
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 is expected to be maintained on the site for replay through Tuesday, October 31, 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.
This news release contains statements regarding the proposed transaction between Lucent and Alcatel, the expected timetable for completing the transaction, future financial and operating results, benefits and synergies of 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 and Alcatel and the combined company, as well as Lucent’s and the combined company’s future performance and the industries in which Lucent and Alcatel operate and the combined company will operate, in addition to managements’ assumptions. 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: the ability to consummate the proposed transaction; difficulties and delays in obtaining regulatory approvals for the proposed transaction; 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 and Alcatel; 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 respective 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 annual report on Form 10-K for the year ended September 30, 2005 and quarterly reports on Form 10-Q for the periods ended December 31, 2005, March 31, 2006 and June 30, 2006, and proxy statement dated August 7, 2006 and Alcatel’s annual report on Form 20-F for the year ended December 31, 2005, as amended as well as other filings by Lucent and Alcatel with the U.S. Securities and Exchange Commission (the “SEC”). Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Lucent disclaims any intention or obligation to update any forward-looking statements after the distribution of this news release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.
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