Marconi's core sales down 5% to GBP456m, but orders up 8%

29 January 2003 -- Marconi's preliminary fiscal Q3/2002 results show core sales down 5% from Q2 to GBP456m, but orders up 8%. Annual operating costs fell from GBP635m to GBP550m and - through cutting 1400 more staff - should reach its target of GBP450m by end-March 2004.

29 January 2003 -- London-based Marconi has provided a trading update relating to its fiscal Q3/2002 (to end-December 2002), based on preliminary, unaudited data from Marconi's management accounts.

Core sales were GBP456m (down 5% sequentially from Q2's GBP482m and 28% from GBP632m a year ago). Sales were up in:
-- Europe, Middle East & Africa region (EMEA) by 1% to GBP287m (flat in the UK, with lower sales of optical networks equipment offset by increased sales of voice systems and customer support services; up in Italy due to existing frame contracts as operators deploy core optical backbone and access networks; down in Germany due to further capital expenditure cuts by wireline and wireless network customers and delays to planned 3G mobile network roll-outs); and
-- Central and Latin America (CALA) by 30% to GBP13m (due to two new contracts for Broadband Switching equipment in Mexico and Brazil);
but down in:
-- North America by 11% to GBP127m, mainly due to the continuing tough market conditions and a drop in sales of Broadband Routing and Switching (BBRS) equipment and services to the US Federal Government after the seasonally high level of sales recorded in the previous quarter); and
-- Asia-Pacific (APAC) by 36% to GBP29m, mainly due to delays in capital expenditure and network build projects by Chinese customers, as well as Marconi's disposal of wireless software and services activities in the region (GBP3m in fiscal Q2).

While signs of market stability have been observed in some areas of EMEA, particularly Southern Europe, the North American market showed further tightening of capital expenditure by large telecom operators, particularly towards the end of their financial years in December. In CALA the market was relatively stable, although capital expenditure among major operators in the region remained low. In APAC, the market remains buoyant in Australia, but conditions in China are more difficult due to the re-organisation of key customers, delays to the roll-out of network build projects and increased pricing pressure on new business.

Marconi continued to benefit from its customer base of predominantly incumbent operators and government agencies. Most sales were derived from existing frame contracts. Marconi's 10 largest customers during the quarter were (in alphabetical order): BellSouth, BT, Ericsson, Metro City Carriers, Telecom Italia, Telkom South Africa, UK Government, US Federal Government, Verizon and Vodafone Group, accounting for 46% of core sales (fiscal Q2's 10 largest customers comprised 48%). BT remains Marconi's largest customer and accounted for 19% of core sales (the same as fiscal Q2).

Broken down by activity:
-- Network Equipment sales fell 8% to GBP261m: Optical Networks 11% to GBP96m; Other Network Equipment 27% to GBP11m. Network Services sales fell 1.5% to GBP195m.
-- BBRS equipment sales fell 9% to GBP32m. BBRS services (consolidated within Network Services) fell 25% to GBP18m.
-- European Access sales were stable at GBP69m; North American Access sales were stable at GBP23m.
-- Outside Plant & Power (OPP) equipment sales fell 12% to GBP30m. OPP services sales (consolidated within Network Services) fell 8% to GBP22m.
-- Installation, Commissioning & Maintenance (IC&M) sales rose 4% to GBP93m.
-- Value-Added Services (VAS) sales fell 6% to GBP102m.

Core orders rose by about 8% to GBP411m, driven by Network Services due to two major UK order extensions: one from London Underground for further communications services for the Jubilee Line and one from BT for narrowband network services. But core order backlog fell 17% to GBP761m, mainly due to Marconi's exit from its IT outsourcing services activity in North America (about GBP100m) and the trading of long-term service and support contracts particularly in the UK and Middle East.

Chief executive Mike Parton said: "Despite slightly lower sales revenues, all our key financial performance measures have continued to improve. Costs have fallen once again. We have generated operating cash in the quarter, margins are higher than in the previous quarter and we are well on the way to returning to operating profitability...These achievements, combined with progress towards our financial restructuring, albeit slower than we would have liked, give us confidence for the future".

Core operating cost annual run-rate was cut from GBP635m at end-September to about GBP550m at end-December; on track to achieve GBP520m target by the end of fiscal 2002. Further actions were initiated to reach the GBP450m target during the financial year to end-March 2004.

Core headcount has been cut since end-September 2002 by about 3000 (500 due to the disposal of the ATC South African legacy operations) to just over 16,000 at end-December. Marconi plans to cut this by a further 1400 in the next few months to about 14,600. Once the reduced operating cost target has been achieved, Marconi expects to employ about 14,000 people in its core business.

Marconi has also reported some delays in its on-going financial restructuring (expected to be implemented on the terms set out in the announcement on 29 August 2002, as subsequently amended on 16 December 2002), which it now anticipates will be implemented in April rather than 15 March. But Marconi remains on track to distribute GBP260m in cash to scheme creditors (including GBP95m interest accrued at 15 October 2002 and already paid to financial creditors).

At end-December 2002, Marconi's net debt was GBP2.8bn: GBP3.9bn of gross financial debt offset by GBP1.1bn in cash.

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