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Wall Street Breakfast

Alcatel-Lucent SA (ALU)
Q2 2007 Earnings Call
July 31, 2007 7:00 am ET


Pascal Bantegnie - VP IR
Patricia Russo - CEO
Jean-Pascal Beaufret - CFO


Alexander Peterc - Exane BNP Paribas
Paul Sagawa - Sanford Bernstein
Tim Boddy - Goldman Sachs
Tim Long - Banc of America Securities
Richard Windsor - Nomura Securities
Phil Cusick - Bear Stearns
Kulbinder Garcha - Credit Suisse
Stuart Jeffrey - Lehman Brothers
Ken Muth - Robert Baird
Remi Thomas - Cheuvreux
Simon Leopold - Morgan Keegen



Welcome to the Alcatel Lucent 2007 Second Quarter Earnings Release Conference Call. At this time all participants are on a listen-only mode. Later we will conduct a question and answer session instructions will be given at that time (Operator Instructions).

And as a reminder this conference is being recorded. I would now like to turn the conference over to Pascal Bantegnie. Please go ahead.

Pascal Bantegnie

Thank you, Mary. Hello to everyone and welcome to our second quarter 2007 earnings call. With me today on the call are Pat Russo, Alcatel Lucent Chief Executive Officer, Jean-Pascal Beaufret, Chief Financial Officer. Pat and Jean-Pascal will provide an overview for second quarter results and discuss the market and company’s outlook.

Later in the call we’ll conduct a question and answer session. Please restrict yourself to one question please and no follow-up question. If anyone has not yet seen a copy of our earnings release or the slide presentation from the webcast of this call, which is available on our website at alcatellucent.com.

Before we begin I’d like to remind you that certain statements we’ll be making today maybe considered forward-looking. Please refer to the Safe Harbour statements contain in today’s releases.

At this point I’d like turn the call over to Pat.

Patricia Russo

Hello, everyone. Thank you for joining us today. We have some -- we seem to have technical issue here, we’re looking into. Okay, as you all now earlier today we announced our audited results for the second of quarter 2007. I’m just going to wait here for a minute until we find out what is happening technically.

Okay, I’ll try to move ahead here. Before Jean-Pascal reviews the numbers in more detail, I’ll make some comments about the quarters result. As you all know, we are now halfway through the year and we have had two full quarters as a combined company. I would tell you we remain encouraged by the progress we are making in some key areas during the quarter, we’ll talk about those. Overall, while a few of our businesses were down year-to-year, most of our businesses grew in this quarter on a year-over-year basis.

First, our Q2 revenues sequentially grew by a solid 13% at a constant exchange rate with the strongest performance seen in our wireline and our services businesses. From a regional perspective we saw a strong growth in Asia-Pacific. This revenue growth is a bit above what we said when our Q1 results were announced. I think the strength and the depth of our combined product portfolio, our ongoing communications with customers around our merged portfolio, and our plans for that has enabled us to continue to build some solid momentum in our order intake, which has contributed to revenue growth in the quarter.

Secondly, we remained focused on executing on our integration plans and taking cost out of the business. During this quarter we saw some evidence of cost reductions out of our cost structure primarily coming from our IS/IT and R&D. It is clear to us that in area such as savings from procurement were existing inventories need to be factored in. The savings ramp in this area will be seen more clearly in the second half of the year.

During the quarter, we had further headcount reductions of approximately 1,900 positions. This was before the impact of new managed service contracts and acquisitions, which were around 400 positions. Year-to-date we’ve reduced approximately 3,800 before the impact of managed service deals. This represents 30% of our three year target of 12,500.

Our Q2, 2007 gross margin suggest difficult pricing environment, one that has been impacted in the short-term and not only our need to withstand some level of collective efforts by our competitors to unseed us our customers but, as well they -- need occasionally to support some product migrations. Additionally for this transition year of 2007, we are strategically reinvesting the gross margin savings in selective markets to position the company for the long-term, while achieving most of our operating expense savings on a comparable basis.

In the second quarter gross margin was negatively effected by or negatively impacted by an unfavourable product in geographic mix, continued investments as I described and the impact of some product transitions cost as customers migrate their networks.

Our integration and synergy plans are progressing. We’re clearly gaining more visibility on the combined businesses as the people, process and systems come together. Clearly gross margin this quarter is lower than we would have liked. It’s lower than what we believe is our opportunity, and we don’t believe that it’s indicative of the business going forward. We face the tensions as you all know on regaining sales momentum. We know in our industry that decisions customers make to buy or not can have long-term consequences.

During the quarter, we signed and announced more than 46 contracts some of which represent revenue synergies. These winds stand our entire product application and service portfolio and I think demonstrates the strengths of the company. A few examples, we announced, $400 million contract with India’s, Reliance Communications. This is a case where we were selected not only to expand the CDMA network to more than 20,000 towns and 600 villages, but the solution also includes GSM and so we are entering the GSM portion of their network for the first time.

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