ECI Telecom announces Q2 and first half 2003 results

6 August 2003 Petah Tikva, Israel Lightwave Europe -- ECI Telecom Ltd today announced consolidated results of operations for the second quarter and six months ended 30 June.

Aug 6th, 2003

6 August 2003 -- Petah Tikva, Israel -- ECI Telecom Ltd today announced consolidated results of operations for the second quarter and six months ended 30 June.

Second Quarter Results
Revenues for the second quarter of 2003 were USD 102 million compared to USD 119 million in the first quarter of 2003 and USD 174 million in Q2 2002. Gross profit was USD 37.3 million (36.7% of revenues), compared to gross profit of USD 48.7 million (41.0%) in the first quarter and USD 67.5 million (38.8%) in the second quarter of 2002.

The operating loss for the second quarter of 2003 was USD 34.3 million compared to an operating loss of USD 5.6 million in the first quarter and an operating loss of USD 3.2 million for Q2 2002. The net loss for Q2 2003 was USD 35.0 million, or USD 0.32 per share, compared to a net loss of USD 7.8 million, or USD 0.07 per share in Q1 2003 and a net loss of USD 7.5 million, or USD 0.07 per share in the second quarter of 2002.

Second quarter 2003 results include several specific items totalling approximately USD 21 million: a USD 6.6 million provision for a specific doubtful account and a related USD 3.4 million charge recorded in other expenses, a USD 6.7 million impairment of assets associated mostly with ECtel's writedown of goodwill from its NetEye acquisition, and USD 4.4 million in restructuring expenses associated largely with the integration of the Lightscape Optical Networks Division and Enavis into the Optical Networks Division.

During the quarter, the Company continued to generate positive cash flow. The net cash from operations was USD 20 million. At the end of the quarter, cash, cash equivalents, and short-term investments totaled USD 228 million. As previously reported, ECI has reached agreement with its banks and ended the quarter with USD 60 million in long term bank loans.

First Half of 2003
For the first six months of 2003, revenues were USD 220 million compared to USD 350 million for the first half of 2002. Gross profit in the first half of 2003 was USD 85.9 million (39.0% of revenues) compared to USD 131.5 million (37.6%) for the same period last year. The operating loss was USD 39.9 million, compared to a loss of USD 7.8 million for the first half of 2002. The net loss was USD 42.8 million, or USD 0.40 per share, compared to a net loss of USD 59.5 million, or USD 0.57 per share, for the first half of last year.

The Broadband Access Division (formerly the Inovia Broadband Access Division) recorded revenues of USD 45 million in Q2 of 2003 compared to USD 51 million in Q1 2003 and USD 73 million in Q2 of last year. Operating income was USD 4.2 million compared to USD 5.6 million in the first quarter and USD 1.9 million in Q2 of last year.

The operating income reflects improved gross margins resulting from the Company`s vigorous engineering improvements and cost reduction efforts, as well as an advantageous product mix. During the quarter, the Company announced the completion of the OSMINE process for Telcordia Systems Integration. This now enables ECI to offer its products to the major carriers in the US market in line with its strategy of broadening its markets and becoming a global player in the broadband access market.

In addition, ECI continues to invest in, and lead in, products that enable "triple-play" services - voice, data and video. ECI considers this a focus area and believes it holds a particularly strong competitive position in this strategic and promising market. As an example, after the close of the quarter, ECI announced a multi-year contract with the Cyprus Telecommunications Authority (CYTA) for tens of thousands of DSL lines to enable the delivery of voice, data and video services in Cyprus. CYTA's network represents one of Europe's first triple play service networks.

The Optical Networks Division (formerly the Lightscape Optical Networks Division which consisted of Lightscape and Enavis) recorded revenues of USD 40 million in the second quarter of 2003 compared to USD 42 million in Q1 and USD 60 million in Q2 of last year. The operating loss was USD 15.5 million compared to an operating loss of USD 6.3 million in the first quarter and USD 5.5 million in the second quarter last year.

The Division's results reflect the decline in the optical networks market as well as, what ECI believes was a temporary impact of the SARS epidemic in China. During the quarter, ECI established a presence in India and, in July, announced the deployment of the XDM multi-service optical platform at TATA Power Company, part of the TATA Group. The Division has released its new network management system to select customers and is on track to deliver Ethernet switching on the XDM during the fourth quarter.

Other Businesses
ECtel, in which ECI holds a 58% stake, reported revenues of USD 10 million in the second quarter of 2003 compared to USD 15 million in Q1 of 2003 and USD 24 million in the second quarter of 2002. Its net loss was USD 13.8 million compared to a net loss of USD 3.8 million in Q1 and a net profit of USD 4.3 million in the second quarter of 2002. Second quarter 2003 results include a goodwill impairment charge of USD 6.0 million.

Sales to Veraz Networks totalled USD 6.5 million in the second quarter of 2003 compared to USD 8.7 million in the first quarter. ECI holds 43% of privately-held Veraz. ECI manufactures and sells DCME (Digital Circuit Multiplication Equipment) and Voice over IP products to Veraz for resale.

Veraz recently announced that wholesale long distance providers, BtNAccess, a wholly owned subsidiary of PCCW, and vNet, a North American carrier, have deployed Veraz's network solution to deliver toll-quality long distance and carrier peering services to their carrier customers.

Similarly, CODETEL, a Verizon company, and M1 from Singapore have deployed Veraz's media gateway for their international bilateral VoIP traffic exchange.

Doron Inbar, President and CEO said, "Our results reflect the continuing weakness in the telecommunications industry and the extremely cautious stance taken by carriers and service providers. This was especially noticeable in the results of our Optical Networks Division.

"However, with a slightly increased level of market activity, as well as the expected decline of the SARS scare, we now expect to see sequential revenue growth and improved operating results in the Division. We have also now completed the previously announced integration of Lightscape and Enavis into the Optical Networks Division.

"In the Broadband Access Division we are pleased to report continuing strong profitability - in spite of the decline in revenues, which is likely to continue into the third quarter. The revenue decline reflects procurement and deployment cycles for multi-year contracts at our large accounts, where we are maintaining our market share, as well as the general price decline in this market.

"We expect continued strong demand in the broadband access market expanding beyond ADSL to areas such as VDSL, Fibre To The Premises, and Fibre To The Kerb. We are encouraged by our strong position in the VDSL market, especially in Europe, and are committed to becoming an important player in the FTTP and FTTC markets.

"We remain focused on financial prudence as we continue to generate positive cash flow, build our cash position and reduce operating expenses. Although it is difficult to give specific guidance for Q3 in light of the continued limited visibility in the market, we expect the decline in revenues in Broadband Access to be offset by growth in Optical Networks, resulting in essentially flat to slightly lower revenues in our core businesses.

"Despite the disappointing results of Q2, we are becoming increasingly confident in our ability to execute our strategy. Our organisation, competitive product line and cost structure are now aligned with our strategy and with market reality. These factors, in addition to our strong balance sheet, are the foundations for creating growth and for becoming a strong, world-class competitor."

Separately, ECI announced today that Gerd Tenzer, former Deputy Chairman of the Board of Management of Deutsche Telekom, has joined the ECI Board of Directors.

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