Lucent turns a profit at last but still cautious

23 October 2003 Murray Hill, NJ Lightwave Europe -- Lucent Technologies (yesterday) reported its first profitable quarter (Q4 2003) since March 2000, posting net income for the quarter that was USD 99 million or 2 cents per share.

Oct 23rd, 2003

- Records profitable quarter, with net income of 2 cents per share
- Generates positive operating cash flow of USD 145 million
- Posts revenues of USD 2.03 billion for the quarter, an increase of 3% sequentially
- Russo: "We are seeing signs of stability in the overall telecom market... we will still have some ups and downs."

23 October 2003 Murray Hill, NJ Lightwave Europe -- Lucent Technologies has reported its first profitable quarter (Q4 2003) since March 2000, posting net income for the quarter that was USD 99 million or 2 cents per share.

These results compare with a net loss of USD 254 million or 7 cents per share in the Q3 2003 and a net loss of USD 2.81 billion or 84 cents per share in the year-ago quarter.

The company recorded revenues of USD 2.03 billion in the quarter, which is an increase of 3% from the USD 1.96 billion in revenues for Q3 2003. The company recorded USD 2.28 billion in revenues in the year-ago quarter.

The Q4 earnings per share included the negative impact of charges associated with the reversal of some previously recognised income tax benefits, an asset impairment charge related to capitalised UMTS software development costs, and the revaluation of warrants that are expected to be issued as part of Lucent's global settlement of shareowner litigation.

All of this was more than offset by the positive impact from bad debt and customer financing recoveries, a net reduction of reserves for certain business restructuring actions, and certain other items including employee expenses. The net effect of these charges and benefits was a favourable impact of about 2 cents per share on the Q4 results.

For the fiscal year (2003), Lucent reported revenues of USD 8.5 billion compared with USD 12.3 billion in 2002. The net loss was USD 770 million or 29 cents per share during fiscal 2003, compared with a net loss of USD 11.8 billion or USD 3.49 per share (2002).

Lucent Technologies Chairman and CEO Patricia Russo said, "It feels great to post a profitable quarter with positive operating cash flow. It's the culmination of a lot of hard work and dedication on the part of the Lucent team.

"At this point, we have essentially completed our restructuring initiatives, reduced our total expenses by about USD 5.6 billion year on year, and implemented plans to broaden our revenue base in areas like services, government contracts and outside the USA.

"As we exit fiscal 2003 and begin a new year, we still have some work to do, and in the current challenging market environment it's likely we will still have some ups and downs on the way to sustained profitability," continued Russo.

"We are seeing signs of stability in the overall telecom market, with pockets of opportunity in areas like services, metro optical, voice over IP, broadband access and high-speed wireless data.

"During the quarter, for example, we announced some major wireless wins with China Unicom and Sprint; optical wins with AT&T and Dacom in South Korea; broadband wins in Poland and Sweden; and key services wins with O2 in Europe and KTF in Korea. In addition, just this week we announced a major broadband win with Bell Canada."

Chief Financial Officer Frank D'Amelio added, "We continue to make progress improving our gross margin. This quarter, we increased our gross margin from 29 to 43%, primarily due to a favourable mix of products and services, as well as continued cost reductions."

"While our margin improvement helped us achieve profitability this quarter, it is not a rate we expect to maintain during fiscal 2004 due to anticipated quarterly shifts in product and geographic mix and the non-recurrence of certain favourable items," said D'Amelio

"While we are not giving specific guidance for next quarter, we expect to achieve sustainable profitability some time in fiscal 2004 at a margin rate of about 35%. We also expect revenues to remain essentially flat or to increase slightly year over year. As always, we will continue to focus on managing our cost and expense profile, while we increase our investment in certain new product areas like voice over IP," said D'Amelio.

Balance sheet
As of 30 September 2003, Lucent had USD 4.5 billion in cash and short-term investments. This represents a decrease of approximately USD 400 million in the quarter. The decrease primarily resulted from the repurchase of USD 500 million of certain convertible securities and debt obligations, which will result in an annual reduction of approximately USD 50 million in fixed charges. Cash generated from operations was USD 145 million during the quarter, compared to a use of USD 58 million in Q3

Lucent also recorded a non-cash charge to equity of USD 594 million related to its management pension plans, largely as a result of declines in interest rates used to develop the discount rate to value the plans' obligations. While the charge to equity did not impact quarterly results, it did result in the reversal of USD 165 million of previously recognized income tax benefits. The plan meets all the requirements of ERISA's funding rules and does not require cash contributions during fiscal 2004.

On a sequential basis, revenues in the United States were "flat" at USD1.2 billion, and international revenues increased 7% to USD820 million. Compared with the year-ago quarter, U.S. and international revenues decreased by 16% and 2%, respectively.

The company continues to focus on new revenue opportunities in its services and government businesses as well as its global business partner program, while delivering next-generation products.

Lucent said its highlights this past quarter included:
- Several professional services contracts with international carriers like KTF in Korea and O2 in the United Kingdom, which awarded Lucent a three-year agreement to assess and analyze the performance of its GSM and GPRS networks in Europe.
- Maintenance and deployment contracts with Delta Telecom, E-plus, Sprint, Codetel and Moscow Cellular Communications.
- The addition of another 20 global business partners serving 30 countries in Europe, the Middle East and Africa, and several optical and VoIP contracts that were won in Europe this quarter through business partners.
- A contract with Bechtel National, Inc., to assist in the repair and rehabilitation of the communications network in Iraq, including the installation and deployment of 240,000 lines serving Baghdad and the region.

Integrated Network Solutions (INS)
Revenues for the fourth quarter of fiscal 2003 were USD 1.11 billion, an increase of 5% sequentially and a decrease of 11% compared with the year-ago quarter.

In Q4, Lucent had several significant optical and broadband announcements:
- A significant multi-year contract in which AT&T will use Lucent's Metropolis DMX Access Multiplexer to provide next-generation SONET capabilities to its network.
- Metropolitan optical network wins with ICE in Costa Rica, Sasktel in Canada and Dacom in Korea.
- An optical backbone contract for its WaveStar OLS 1.6T System with KT in Korea, and for the LambdaUnite MultiService Switch in China.
- Significant contract awards this quarter featuring two of Lucent's leading access network products � the AnyMedia Access System in Poland and the Stinger FS DSL Access Concentrator in Sweden.
- A second customer trial, announced by business partner D-Tel, for Lucent's new iGen™ Compact Switch.

Mobility Solutions
Revenues for the fourth quarter of fiscal 2003 were USD856 million, an increase of 4%sequentially and a decrease of 9% compared with the year-ago quarter.

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