Alcatel-Lucent Reports Q2 2015 Results

Paris, July 30, 2015 – Alcatel-Lucent’s (Euronext Paris and NYSE: ALU) results for Q2 2015 once again demonstrate good resilience in an overall soft spending environment notably in North America, with continued solid progress in margins and free cash flow.

Commenting on the results, Michel Combes, CEO of Alcatel-Lucent, said: “Our second quarter 2015 results represent a significant milestone for Alcatel-Lucent, reflecting the first Q2 of free cash flow generation since the merger of Alcatel and Lucent in 2006. Alcatel-Lucent’s financial results for the first half of 2015 clearly show that the company has delivered on the key objectives of The Shift Plan, launched two years ago. The company is now well on track to complete its turnaround by the end of the year.

Today we can also report that progress towards the proposed combination with Nokia is well on track, in particular with regulatory approvals being secured in a number of jurisdictions. This is a positive endorsement of the project, as Alcatel-Lucent prepares to write the next chapter of its transformation story, and becomes part of a powerhouse in global communications today and long into the future.”

Highlights of Q2 2015

• Group revenues, excluding Managed Services and at constant perimeter, increased 6% year-on-year. At constant exchange rates, Group revenues, excluding Managed Services and at constant perimeter, were down 8%. The weight of next-generation activities continued to progress, representing 76% of revenues compared to 70% in the year-ago quarter. Next-generation technologies revenues increased 15% year-over-year at actual rates and declined 1% at constant exchange rates.
• Gross margin reached 34.8% of revenues, expanding 220 bps year-on-year, driven notably by improved profitability and favorable software mix across several business lines.
• Cumulative fixed cost savings totaled Euro 746 million through Q2 2015, reflecting ongoing initiatives as well as the cumulative improvement in operating reserves since the beginning of the Shift Plan.
• Operating expenses increased 10% year-over-year at actual rates, and were down 3% at constant exchange rates.
• Adjusted operating income totaled Euro 175 million, or 5.1% of revenues, compared to Euro 136 million in Q2 2014, or 4.1% of revenues. Profitability of our Core Networking segment improved 10 bps to reach an adjusted operating margin of 9.1% while our Access segment improved 70 bps to reach an adjusted operating margin of 1.3%.
• As reported, the Group showed a net loss (Group share) of Euro (54) million in Q2 2015, or Euro (0.02) per share, compared to Euro (298) million in the year-ago period. In addition to stronger operating profitability, the improvement mainly reflects lower financial expenses and restructuring costs.
• Free cash flow was Euro 65 million, an improvement of Euro 270 million year-over-year, reflecting stronger operating profitability, improved operating working capital and lower non-operating cash items. Free cash flow before restructuring was Euro 158 million, an improvement of Euro 248 million compared to the year-ago quarter.
• At June 30, 2015, the Group had a net cash position of Euro 212 million, versus a net cash position of Euro 262 million at March 31, 2015.
• At June 30, 2015, the Group’s overall Pensions and OPEB exposure indicated a deficit of Euro (1,065) million compared to a deficit of Euro (1,645) million at March 31, 2015. This change primarily reflects the increase in discount rates over the last quarter. From an ERISA standpoint, which determines funding requirements in the US, the US pension funds remain in a surplus and we do not expect to make any additional contributions to these plan assets for the foreseeable future. In addition, consistent with prior announcements, Alcatel-Lucent is making an offer to approximately 86,000 participants in its US pension plans a one-time opportunity to convert their currently monthly pensions to a lump sum payment. This offer formally began on July 20, 2015 and ends on September 25, 2015. Payments to those who elect to accept this offer will be made on or about November 2, 2015 from existing plan assets.

Highlights of January – June 2015

• Group revenues, excluding Managed Services and at constant perimeter, increased 9% year-on-year. At constant exchange rates, Group revenues, excluding Managed Services and at constant perimeter, are down 6%. The weight of next-generation activities represented 75% of revenues compared to 69% in the year-ago period. Next-generation revenues increased 19% year-over-year at actual rates and 4% at constant exchange rates.
• Gross margin reached 34.7% of revenues, improving 230 bps compared to the first half of 2014.
• Adjusted Operating income totaled Euro 257 million, or 3.8% of revenues compared to Euro 169 million, or 2.7% of revenues in the year-ago period.
• As reported, the Group showed a net loss (Group share) of Euro (126) million, an improvement of Euro 245 million compared to the net loss of Euro (371) million in the year-ago period.
• Free cash flow of Euro (267) million, an improvement of Euro 336 million compared to the first half of 2014. Free cash flow before restructuring was Euro (62) million, an improvement of Euro 316 million year-over-year.

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CORE networking

Core Networking segment revenues were Euro 1,675 million in Q2 2015, up 22% year-over-year at actual rates and up 10% at constant rates. Adjusted operating income totaled Euro 153 million, or 9.1% of segment revenues in Q2 2015, compared to Euro 123 million or 9.0% of revenues in Q2 2014, reflecting continued strong contribution from IP Routing in addition to improvements in both IP Transport and IP Platforms. Core Networking segment operating cash flow was Euro 192 million in the quarter, an increase of Euro 89 million compared to Q2 2014.

IP Routing revenues were Euro 659 million in Q2 2015, an increase of 17% at actual rates and 3% at constant rates, when compared to Q2 2014. The business witnessed double-digit growth in EMEA and CALA, resilience in North America and declines in APAC driven by a continued spending pause in Japan. Revenues from non-telco customers grew at a double-digit pace year-over-year, at constant exchange rates, reflecting the continued progress in our market diversification strategy.

• Expansion into the core routing market continues, as our 7950 XRS IP Core router saw strong year-over-year revenue growth and registered 5 new wins in Q2, for a total of 44 wins to date.
• Continued momentum in virtualized routing both in and outside the telecom service provider space with 8 new customers for the Virtualized Service Router (VSR) in Q2 2015, bringing the total to 16 deployments and over 75 trials underway, including our NFV trial with Telefonica which includes our VSR.
• Introduction of the Network Services Platform, the industry’s first carrier SDN platform that unifies network service automation and carrier network optimization across IP and Optical layers.
• Nuage added 5 new customers, bringing the total to 25 wins, including China Mobile, and announced collaborations with both Arista and Mirantis as part of Nuage Networks ecosystem program. Nuage also introduced the Virtualized Services Assurance Platform (VSAP), which addresses the need for visibility and correlation between the virtual networks for applications and workloads and the physical connectivity provided by the datacenter network infrastructure.

IP Transport revenues were Euro 630 million in Q2 2015, up 30% at actual rates and 21% at constant rates, compared to the year-ago quarter. Terrestrial optics revenues showed strong double-digit growth at constant rates, as WDM witnessed strength in EMEA, CALA and APAC. The cyclical upswing continued in our submarine business, as revenues grew more than 40% at constant rates and our pipeline grew with new awards and contracts signed.

• Within WDM, our 1830 Photonic Service Switch (PSS) platform represented 52% of terrestrial optical product revenues in the quarter, up 9 percentage points year-on-year, and was notably selected by the Beijing and Nanning Railway Bureaus in China to upgrade the ‘backbone’ communications networks of rail lines in China.
• In Q2 2015, our 100G shipments represented 51% of total WDM line cards shipments, an increase of 15 percentage points year-on-year. Recent 100G announcements include both Telecom Italia and Tiscali in Italy in addition to AIS in Thailand.
• Alcatel-Lucent and T-Mobile Czech Republic successfully completed a trial of 400G data transmission over an existing network using our 1830 PSS with the 400G Photonic Service Engine (PSE).
• ASN registered a number of new wins in Q2 2015, including the first phase of a new route linking Japan to Europe passing along Alaska, in addition to successfully achieving a new transmission record for capacity upgrade on the Apollo South system, which connects France to the United States. A lab trial also achieved a distance record for undersea data transmission over more than 10,000 km using unique 300G technology of ASN’s 1620 SOFTNODE platform.

IP Platforms revenues were Euro 386 million in Q2 2015, a year-on-year increase of 19% at actual rates and 3% at constant rates. The business was driven by IMS for VoLTE, which witnessed strong traction in North America and benefitted from geographic expansion into other regions. This was partially offset by declines in Policy and Charging and SDM, which had difficult year-over-year comparisons, and the tail-end of the phase out of legacy businesses.

• Alcatel-Lucent launched Rapport™, a software-based, open platform that gives large enterprises and service providers a better way to deliver communications and collaboration services. KPN recently selected the platform to simplify and consolidate a number of voice services, such as VoLTE, onto one platform.
• Robi Axiata Limited, a leading mobile operator in Bangladesh, is one of the first carriers to deploy Alcatel-Lucent’s new Motive OSS software portfolio throughout their data centers, to enhance their consumer experience and provide a view of network performance.
• We issued our “Mobile Device Report” which uses the Motive Wireless Network Guardian to look at how different devices behave on and impact the network. Service providers can use insights like these to predict the impact of device growth while optimally planning network growth and the promotion of new devices.
• CloudBand, our NFV platform, is involved in 27 projects, 5 of which are commercial deployments, and recently signed a memorandum of understanding with Telefonica to test NFV technologies to investigate how mobile networks can be transformed to meet demands being placed on them by the Internet of Things, machine-to-machine communications and increased customer connectivity.

ACCESS

Access segment revenues were Euro 1,772 million in Q2 2015, a decrease of 7% year-over-year at actual rates and a decrease of 20% at constant rates. In Q2 2015, segment operating income was Euro 23 million, compared to a segment operating income of Euro 11 million in Q2 2014, reflecting improvements from both Wireless and Managed Services, in addition to continued double-digit margin contribution from Fixed Access. Segment operating cash flow was Euro 129 million in the quarter, Euro 138 million better than Q2 2014, reflecting improved operating working capital.

Wireless Access revenues were Euro 1,148 million, a year-on-year decrease of 12% at actual rates and 27% at constant rates. Marked by a difficult comparison base in the year-ago quarter, the sales decline was driven by lower spending in the US and project timing in China.

• Alcatel-Lucent signed frame agreements with China Mobile and China Unicom, where Alcatel-Lucent will deliver a range of products including mobile and fixed ultra-broadband access, IP routing, NFV and Nuage’s SDN technologies.
• Alcatel-Lucent and China Mobile conducted the industry’s first field trial of a virtualized radio access network-based architecture using network functions virtualization (NFV) technology, which was carried out at Beijing’s Tisinghua University.
• The advancement of 5G development is a crucial area of research for Alcatel-Lucent, as evidenced by our recent announcements:
  • The signing of a memorandum of understanding with KT to test technologies for the eventual introduction of 5G mobile networks and infrastructure capable of meeting the huge connectivity demands expected in the future.
  • Our participation in the FANTASTIC-5G project, a group of 16 leading players in the field of telecommunications are joining forces to advance the development of a new air interface below 6 GHz for 5G networks.
  • Collaboration agreement between Bell Labs and Technische Universität Dresden’s 5G Lab Germany to develop and test technologies that will help to define the capability of 5G mobile networks in meeting the massive connectivity demands of the future, with the high-performance required by end-users.
• Momentum with small cells continued in the quarter as Alcatel-Lucent expanded its Site Certification Program to help service providers quickly deploy small cells and as AIS in Thailand deployed Alcatel-Lucent technology to improve cellular services for customers.

Fixed Access revenues were Euro 548 million in Q2 2015, an increase of 5% compared to the year-ago quarter at actual rates and a decrease of 6% at constant rates. Traction with fiber and next generation products continued in APAC with China returning to growth, but was offset by declines in EMEA and the continued spending pause in North America.

• Our next-generation technologies are seeing strong market traction, as evidenced by recent announcements with BT, which is trialing G.fast, Vodafone, which is trialing TWDM-PON, and with Energia in Japan, which will trial both G.fast and TWDM-PON technologies to increase network speeds over existing copper and fiber.
• Bell Canada and SiFi Networks, a US fiber optics network provider, will both deploy Alcatel-Lucent fiber products as they roll out ultra-broadband access.
• We launched a number of new products and solutions in the quarter, including:
  • G.fast home networking residential gateway, which provides service providers an end-to-end solution to accelerate the deployment of ultra-broadband access in homes and businesses.
  • New FX-12 fiber platform in a form factor designed for cable MSOs, supporting 10G EPON services.
  • PSTN Smart Transform, a solution that enables communications providers to transition their existing voice services from ‘legacy’ PSTN (public switched telephone network) technology to more cost-effective all-IP ultra-broadband infrastructure. This has witnessed early success, including a win with Deutsche Telekom.

GEOGRAPHICAL INFORMATION

North America revenues increased by 2% at actual rates year-over-year and declined by 18% at constant rates, reflecting a softer spending environment in the region compared to the year-ago quarter. Europe witnessed improving trends, with revenues increasing 9% year-over-year (7% at constant rates), driven by positive momentum in IP Transport and IP Routing. Asia Pacific posted a 3% year-over-year increase in revenues at actual rates and a 12% decrease at constant rates, mainly reflecting project timing in China related to Wireless Access and continued weakness in Japan, partially compensated by growth in South-east Asia, Australia and India. In Rest of World, revenues increased 11% year-over-year (4% at constant rates), as double-digit growth in CALA was partially offset by declines in MEA.

P&L HIGHLIGHTS

*At constant rate

Cash flow statement highlights

Balance sheet highlights

Alcatel-Lucent will host a press and analyst conference at 12.45 p.m. CET which will be available live via conference call or audio webcast. All details on http://www.alcatel-lucent.com/investors/financial-results/Q2-2015

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Notes

The Board of Directors of Alcatel-Lucent met on July 29, 2015, examined the Group’s unaudited interim condensed consolidated financial statements at June 30, 2015, and authorized their issuance.

The interim condensed consolidated financial statements are unaudited. They are available on our website http://www.alcatel-lucent.com/investors/financial-results/Q2-2015

Operating income is the Income from operating activities before restructuring costs, litigations, impairment of assets, gain on disposal of consolidated entities and post-retirement benefit plan amendments.

“Adjusted” refers to the fact that it excludes the main impacts from Lucent’s purchase price allocation.

“Segment operating cash flow” is the adjusted operating income plus operating working capital change at constant exchange rate.

 “Operating cash-flow” is defined as cash-flow after changes in working capital and before interest/tax paid, restructuring cash outlay and pension & OPEB cash outlay.

ADJUSTED PROFORMA RESULTS

In the second quarter, the reported net loss (Group share) was Euro (54) million or Euro (0.02) per diluted share (USD (0.02) per ADS) including the negative after tax impact from Purchase Price Allocation entries of Euro 5 million.

In addition to the reported results, Alcatel-Lucent is providing adjusted results in order to provide meaningful comparable information, which excludes the main non-cash impacts from Purchase Price Allocation (PPA) entries in relation to the Lucent business combination. The second quarter 2015 adjusted net loss (Group share) was Euro (49) million or Euro (0.02) per diluted share (USD (0.02) per ADS).

E/ADS calculated using the US Federal Reserve Bank of New York noon Euro/dollar buying rate of 1.1154 USD as of June 30, 2015.

RESTATEMENT OF 2015 – 2014 BREAKDOWN BY OPERATING SEGMENTS