q2 2010 earnings - alcatel- · pdf filefuture financial and operating results of...

Q2 2010 Earnings

July 30, 2010

Introductory RemarksBen Verwaayen - CEO

3 | Q2 2010 Earnings All Rights Reserved © Alcatel-Lucent 2010 July 2010

Safe Harbor For Forward Looking Statements

Except for historical information, all other information in this presentation consists of forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995, as amended. These forward looking statements include statements regarding the future financial and operating results of Alcatel-Lucent such as, for example, an adjusted operating margin in the low to mid single-digit (between 1% and 5%) for 2010. Words such as "expects," "anticipates," "targets," "projects," "intends," "plans," "believes," "estimates," “aim,” “goal,” “outlook,” momentum,” “continue,” 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; difficulties and delays in our ability to execute on our strategic plan to adjust our product portfolio by boosting investment in certain segments and reducing spending in others, co-source certain business processes, focus on cash, and reduce costs; fluctuations in the telecommunications market; exposure to the pricing pressures in the regions in which we sell; 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 and in particular to source components in a tight market; 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; compliance with environmental, health and safety laws; the economic situation in general (including exchange rate fluctuations) and uncertainties in Alcatel-Lucent’s customers’ businesses in particular; customer demand for Alcatel-Lucent’s products and services; control of costs and expenses; international growth; conditions and growth rates in the telecommunications industry; and the impact of each of these factors on sales and income. For a more complete list and description of such risks and uncertainties, refer to Alcatel-Lucent's Annual Report on Form 20-F for the year ended December 31, 2009, as well as other filings by Alcatel-Lucent with the US Securities and Exchange Commission. Except as required under the US federal securities laws and the rules and regulations of the US Securities and Exchange Commission, Alcatel-Lucent disclaims any intention or obligation to update any forward-looking statements after the distribution of this presentation, whether as a result of new information, future events, developments, changes in assumptions or otherwise.


Q2 2010 Highlights

Strong sequential top-line growth

Positive adjusted operating income

Strong sequential top-line growth

Positive adjusted operating income

Expectations of a strong second half 2010

Full year guidance reaffirmed

Expectations of a strong second half 2010

Full year guidance reaffirmed

Continuing momentum

Increased relevance with our customers

Continuing momentum

Increased relevance with our customers


Q2 2010 Highlights:Strong momentum in key technologies

IP/MPLS growing close to 30% YoY* driven by data traffic explosion & IP transformation

IP/MPLS growing close to 30% YoY* driven by data traffic explosion & IP transformation

Growth in Wireless with WCDMA up 45% YoY*

& CDMA up 57% sequentially Growth in Wireless with WCDMA up 45% YoY*

& CDMA up 57% sequentially

In Optics, acceleration of growth in WDM

& turning point for microwave transmission

In Optics, acceleration of growth in WDM

& turning point for microwave transmission

* yoy: year-over-year


Q2 2010 Highlights:Good prospects for Services

Increased book-to-bill ratio for ServicesIncreased book-to-bill ratio for Services

Networks projects in MEA & Americas drivingsignificant growth in orders for

Network build & implementation

Networks projects in MEA & Americas drivingsignificant growth in orders for

Network build & implementation

Network & System integration, strong order book growth with major wins

Network & System integration, strong order book growth with major wins


Q2 2010 Highlights:Improvement in component supply

Tightening supply/demand planning processesTightening supply/demand planning processes

Improved alignment & linkage with suppliersImproved alignment & linkage with suppliers

Further improvement expectedFurther improvement expected


Q2 2010 Highlights

+17% yoy growth in North America:Good momentum in all key technologies

Mixed bag in APAC:Decline in China partially offset with India

Recovery In Eastern Europe:Stability reached in Q2

+17% yoy growth in North America:Good momentum in all key technologies

Mixed bag in APAC:Decline in China partially offset with India

Recovery In Eastern Europe:Stability reached in Q2

Western Europe still mutedWestern Europe still muted


Q2 Operational highlights

Better efficiency of manufacturing, processes & field operations

Better efficiency of manufacturing, processes & field operations

Inventories increase to prepare strong H2Inventories increase to prepare strong H2

Significant gross margin improvement 300 bp from Q2 ‘09 & 350 bp from Q1 ‘10

Significant gross margin improvement 300 bp from Q2 ‘09 & 350 bp from Q1 ‘10


Q2 Strategic milestones & major wins

Maintained a strong momentum in IP 100G Ethernet field trial with Verizon

Selected by AT&T as IP/MPLS/EPC domain supplier

Maintained a strong momentum in IP 100G Ethernet field trial with Verizon

Selected by AT&T as IP/MPLS/EPC domain supplier

Reinforced our technological leadership in Optics100G solution on a single wavelength selected by T-Systems & Softbank

Deployment of a submarine cable for ACE consortium

Reinforced our technological leadership in Optics100G solution on a single wavelength selected by T-Systems & Softbank

Deployment of a submarine cable for ACE consortium

Build on our leadership position in fixed BB accessSelected as a strategic supplier by NBN

Supplier of PON technologies for China Telecom & China MobileDSL pair-bonding used by AT&T

Build on our leadership position in fixed BB accessSelected as a strategic supplier by NBN

Supplier of PON technologies for China Telecom & China MobileDSL pair-bonding used by AT&T


High Leverage NetworkTM (HLN)Key programs and common assets across the HLN portfolio

Converged service control

Convergededge

Converged wireline access

Converged metro andaggregation

Converged RAN

Convergedbackbone

Converged service-awarenetwork management

Converged RAN

Small CellsSelf-X

Wireless PacketCore

Converged Fixed Access

platform

Converged IP/Optical backbone

CommonManagement

(Unify)

MPR/SAR integration

Video &ContentDelivery

Core IP

Routing

IMS

Core

WDM40G/100GCoherent


High Leverage NetworkTM (HLN)Recent wins confirm strong market traction and customer endorsement

Converged service control

Convergededge

Converged wireline access

Converged metro andaggregation

Converged RAN

Convergedbackbone

Converged Network Gateway and WDM

IP/MPLS Domain Partner

100G

Major WDM trials in progress

Trials Ethernet

WDMwin

Trial IP& WDM

IPwin

VDSL Access

Five major new or extension contractsWorld 1st Bonding deployment (AT&T)On-going Vectoring trials in progress

IP Mobile Backhaul

IMS Core

Five new contracts across continents – including:

PON Access

Six new major contracts including:

50 trials to date – including:

Three new trials in Q2 ‘10

LTE (RAN + EPC)

Small Cells

Five new contractsor trials

across 8 countries

2G/3G

Seven new contractsincluding:

Submarine NetworkingSustained breakthroughs:

3Tbit/s data transmission showcasedBuilt-in 40Gbits/s capability


Outlook

Strong H2 expected backed by order book

& significant leverage effect on profitability

Strong H2 expected backed by order book

& significant leverage effect on profitability

Full-year 2010 outlook maintainedFull-year 2010 outlook maintained

Q2 2010 ResultsPaul Tufano - CFO


Q2 ’10 Adjusted P&L

In Euro Million Q2 '10 Q2 '09 YoY Q1 '10 QoQ

Revenues 3,813 3,905 -2.4% 3,247 17.4%

Gross profit 1,377 1,293 84 1,058 319Gross margin 36.1% 33.1% 3.0 pt 32.6% 3.5 pt

R&D Gross (621) (617) 0.6% (579) 7.3%in % of revenues 16.3% 15.8% 0.5 pt 17.8% -1.5 pt

Capitalization / Other (9) 1 (8)

R&D Net (630) (616) 2.3% (587) 7.3%in % of revenues 16.5% 15.8% 0.7 pt 18.1% -1.6 pt

SG&A (719) (739) -2.7% (666) 8.0%in % of revenues 18.9% 18.9% -0.1 pt 20.5% -1.7 pt

Total OPEX (1,349) (1,355) -0.4% (1,253) 7.7%in % of revenues 35.4% 34.7% 0.7 pt 38.6% -3.2 pt

Op. income (loss) 28 (62) 90 (195) 223Operating margin 0.7 % -1.6 % 2.3 pt -6.0 % 6.7 pt


Q2 ’10 Revenue Breakdown by Operating Segments

In Euro Million

RevenuesQ2 '10 Q2 '09

YoYCurrent

YoYConstant *

Q1 '10QoQ

CurrentQoQ

Constant *

Networks 2,304 2,384 -3.4% -8.0% 1,928 19.5% 13.9%IP 318 286 11.2% 6.0% 272 16.9% 11.3%

Optics 622 728 -14.6% -18.3% 567 9.7% 6.5%

Wireless 1,021 972 5.0% -0.2% 819 24.7% 17.6%

Wireline 366 424 -13.7% -17.5% 298 22.8% 17.2%

Other & eliminations (23) (26) nm nm (28) nm nm

Applications 489 462 5.8% 1.9% 416 17.5% 13.1%Enterprise Applications 305 298 2.3% -0.8% 271 12.4% 9.3%

Networks Applications 188 173 8.7% 3.5% 149 26.2% 20.9%

Other & eliminations (4) (9) nm nm (4) nm nm

Services 883 873 1.1% -5.0% 772 14.4% 9.6%Other & Eliminations 137 186 nm nm 131 nm nmTotal 3,813 3,905 -2.4% -6.9% 3,247 17.4% 11.8%

* YoY & QoQ change, at constant FX rate & perimeter


Q2 ‘10 Operating Income Breakdown by Operating Segments

In Euro Million

Adj. operating income (loss)Q2 '10 Q2 '09

YoYCurrent

Q1 '10QoQ

Current

Networks 55 (136) nm (128) nmin % of revenues 2.4% -5.7% 8.1 pt -6.6% 9.0 pt

Applications (17) (30) nm (27) nmin % of revenues -3.5% -6.5% 3.0 pt -6.5% 3.0 pt

Services 19 87 nm (40) nmin % of revenues 2.2% 10.0% -7.8 pt -5.2% 7.3 pt

Other & Eliminations (29) 17 nm 0 nmTotal 28 (62) nm (195) nm


~13%RoW

~13%RoW ~17%

Asia Pacific~17%Asia Pacific

~31%Europe

~31%Europe

~39%North America~39%North America

Q2 Q2 ’’1010Total Revenue: Total Revenue: €€3,813M3,813M

Q2 Q2 ’’0909Total Revenue: Total Revenue: €€3,905M3,905M

North AmericaAsia PacificEuropeRoW

17 % - 32 %- 9 %

- 14 %

YoY Revenue Δ (in local currencies)

~14%RoW

~14%RoW

~22%Asia Pacific~22%Asia Pacific

~33%Europe

~33%Europe

~31%North America~31%North America

Q2 ’10 Revenues Geographical Breakdown


Balance Sheet Highlights

In Euro Million June 30, '10 March 31, '10 June 30, '09

Goodwill 4,583 4,331 4,202Other intangible assets 2,354 2,259 2,385Other non-current assets (excl. market. sec & pensions) 2,985 2,828 3,167Operating working capital 960 739 1,599Net assets/(liabilities) held for sale 80 56 55Net cash / (debt) 107 512 28

Shareholders’ equity - Group share 2,473 3,514 3,951Minority interests 675 615 556Net Pensions & OPEB 3,694 2,556 2,786Non current liabilities (excl.debt & pensions) 1,461 1,421 1,447Reserves 2,265 2,152 2,150Other current liabilities/(assets) net 502 466 546


Operating Working Capital

June 30, 2010 March 31, 2010 June 30, 2009

In Euro Million

Net inventories* 2,669 2,186 2,437

Net receivables* 3,467 3,287 3,762

Payables & progress payments (5,176) (4,734) (4,600)

OWC as reported ** 960 739 1,599

As % of revenues (12 months) 6.5% 5.0% 9.7%

Trailing 4 quarter revenues 14,713 14,806 16,522

OWC before sales of receivables 1,601 1,325 2,161

As % of revenues (12 months) 10.9% 8.9% 13.1%

* Including amounts related to construction contracts

** Reserves on construction contracts have been reclassified to Provisions in the statement of financial position


Cash Flow Statement

Q2 '10 Q1 '10 Q2 '09In Euro Million

Net (debt)/cash at beginning of period 512 886 (841)

Adjusted operating income 28 (195) (62)Depreciation & Amort; OP non cash; other 66 131 160

Op. Cash Flow before change in WCR* 94 (64) 98Change in operating WCR (202) 219 (280)

Change in other WCR 50 (141) (105)

Operating Cash Flow** (58) 14 (287)Interest (45) (108) (40)

Taxes (46) (22) (18)Cash contribution to pension & OPEB (64) (44) (72)

Restructuring cash outlays (76) (137) (104)

Cash flow from operating activities (289) (297) (521)Capital expenditures (incl. R&D cap.) (146) (132) (175)

Free Cash Flow (435) (429) (696)Discontinued, Cash from financing & Forex 30 55 1,565

Change in net(debt)/cash position (405) (374) 869

Net (debt)/cash at end of period 107 512 28

* Before changes in working capital, interest/tax paid, restructuring cash outlay and pension & OPEB cash outlay

**Operating cash flow now defined as cash generated from operations after changes in working capital but before interest/tax paid, restructuring cash outlay and

pension & OPEB outlay


Funded Status of Alcatel-Lucent Pensions & OPEB (IFRS)

In Euro Million

Pensions OPEB Pensions OPEB Pensions OPEBFair value of plan assets 28,480 490 26,098 536 23,659 451(In USD Million) 34,948 601 35,177 722 33,440 637

Benefit obligations (27,123) (3,649) (24,020) (3,231) (22,203) (3,069)(In USD Million) (33,283) (4,477) (32,377) (4,355) (31,382) (4,338)

1,357 (3,159) 2,078 (2,695) 1,456 (2,618)

Funded Status(In USD Million)

Asset ceiling (1,892) - (1,939) - (1,624) -

Net balance sheet

(1,642)

(2,786)

June 30, '09

(1,162)

June 30, '10 March 31, '10

(617)(832)

(2,556)

(1,802)(2,211)

(3,694)


Outlook

2010 Guidance

• 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-digits (defined as between 1% and 5%).

Questions & Answers

Additional Information


Q2 2010 Reported and Adjusted Results

Q2 '10 Reported

PPAimpacts

Q2 '10 Adjusted

In Euro Million

Revenues 3,813 - 3,813

Gross profit 1,377 - 1,377

SG&A (751) 32 (719 )Net R&D (671) 41 (630 )

Operating income (loss) (45) 73 28

Restructuring (110) - (110 )Litigations (10) - (10 )Financial income (loss) (17) - (17 )Share in net income of equity affiliates 7 - 7Income Tax (4) (28) (32 )Income from discontinued operations (4) - (4 )

Net Income (183) 45 (138 )Minority Interest (1) (1 )

Net Income (Group share) (184) 45 (139 )

Diluted EPS, in € (0.08) (0.06 )

# shares (Million) 2,259.8 2,259.8


Restatement of 2009 Breakdown by Operating Segments

In Euro Million

Revenues Q1 '10 Q2 '10 Q1 '09 Q2 '09 Q3 '09 Q4 '09 FY 2009

Networks 1,928 2,304 2,219 2,384 2,231 2,242 9,076IP 272 318 288 286 283 320 1,177Optics 567 622 657 728 706 763 2,854Wireless 819 1,021 915 972 860 800 3,547Wireline 298 366 393 424 404 398 1,619Other & eliminations (28) (23) (34) (26) (22) (39) (121)

Applications 416 489 444 462 473 535 1,914

Enterprise Applications 271 305 276 298 279 317 1,170Networks Applications 149 188 173 173 199 232 777Other & eliminations (4) (4) (5) (9) (5) (14) (33)

Services 772 883 797 873 869 1,030 3,569Other & Eliminations 131 137 138 186 114 160 598Total 3,247 3,813 3,598 3,905 3,687 3,967 15,157

Adj. operating income (loss) Q1 '10 Q2 '10 Q1 '09 Q2 '09 Q3 '09 Q4 '09 FY 2009

Networks (128) 55 (154) (136) (26) 19 (297)in % of revenues -6.6% 2.4% -6.9% -5.7% -1.2% 0.8% -3.3%

Applications (27) (17) (55) (30) 0 80 (5)in % of revenues -6.5% -3.5% -12.4% -6.5% 0.0% 15.0% -0.3%

Services (40) 19 (63) 87 38 141 203in % of revenues -5.2% 2.2% -7.9% 10.0% 4.4% 13.7% 5.7%

Other & Eliminations 0 (29) 18 17 (23) 31 43Total (195) 28 (254) (62) (11) 271 (56)


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