Alcatel reports fourth quarter and full year 2003 results

Alcatel`s Board of Directors reviewed and approved fourth quarter and full year 2003 results. Fourth quarter sales were up sequentially by 29.4% at Euro 3,765 million compared with Euro 2,909 million (up 32.0% at constant exchange rate). The gross margin remained strong at 33.2% despite the usual fourth quarter unfavorable product mix. Income from operations amounted to Euro 331 million, an 8.8% operating return on sales compared with 5.0% in Q3. Net loss for the quarter was registered at Euro (524) million or diluted Euro (0.39) per share (US$ (0.49) per ADS) and included Euro (524) million of restructuring charges and Euro (210) million of goodwill amortization charges.

For full year 2003, sales amounted to Euro 12,513 million, a 21.9% decrease compared to 2002. At a constant exchange rate, yearly sales decreased by 16%. The gross margin for full year 2003 was 32.8%, a six point improvement over 2002. Income from operations was registered at Euro 332 million compared to loss of Euro (606) million in 2002. Net loss amounted to Euro (1,944) million or diluted Euro (1.46) per share (US$ (1.84) per ADS) and included Euro (1,314) million of restructuring charges and Euro (578) million of goodwill amortization charges, versus a net loss of Euro (4,745) million in 2002.

Serge Tchuruk, Chairman and CEO summarized the Board`s observations:

"Our operating performance in the fourth quarter came out at the high end of our expectations, with revenues growing about 32% quarter over quarter at a constant exchange rate, an operating income returning close to 9% of sales and a net working capital nearing zero. In fact, the fourth quarter return on sales came back nearly to its fourth quarter level of 2000, when sales were about double. In addition to encouraging market trends in Alcatel`s core businesses, this performance is no doubt the result of our severe cost cutting efforts. Nevertheless, beyond the productivity level reached at the end of 2003, there is still potential for improving our operations to the extent of several points of operating profitability. We have therefore decided to go ahead with the final phase of our restructuring, as foreseen at the end of the third quarter. This final phase has been entirely booked in the fourth quarter of 2003, resulting in Euro 524 million of restructuring provisions to be used throughout 2004 in line with the planned execution of the program."

"Our focus is now clearly on growing our business in future years. While stabilizing, the carrier market is still difficult to precisely predict, with currency variation further clouding the issue. But what is clearly increasing is vendors` differentiation. Alcatel grew its market share during the difficult years and we are confident that this trend will continue in the current, more favorable environment."

"In wireline access, a key area for most service providers, our world leadership position strengthened in 2003 with the number of DSL lines shipped doubling to 15 million and our business reach broadening to FTTP and satellite access ("ADSL-in-the-sky"). In wireless networks, our 2003 sales once more withstood the market decline, particularly significant when measured in Euro terms, and we see a similar outlook for 2004 with our market share continuing to grow with our 3G business gaining traction. Our strategy to offer value added, end-to-end application solutions to promote multimedia application solutions in fixed, mobile, and private networks gained considerable momentum. We expect this solutions business to grow by more than 20% in 2004 with current programs in TV over DSL entertainment, convergent payment or messaging application solutions and interactive management systems for enterprises. Finally we progressed significantly in systems designed to evolve networks to next generation architecture with in particular a growing penetration in the VoIP and IP service router markets. We are also getting traction in upgrades of ATM networks to IP/MPLS and data-aware metropolitan optical networks. These new technologies will be leveraged by Alcatel`s large installed network base when carriers accelerate their transition to NGN."

"Even if the market remains uncertain, in view of the book to bill ratio exceeding one for the two previous quarters, we expect Alcatel should resume growth in 2004, at a constant exchange rate. The growth should gradually accelerate during the year following a seasonally low first quarter, which is expected to be almost flat year over year, at a constant exchange rate. We anticipate a positive EPS (pre-goodwill) for the full year, with the seasonally weak first quarter being already close to breakeven."

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Fixed communications

Fourth quarter revenue increased sequentially by 22.8% to Euro 1,647 million from Euro 1,341 million. Broadband access continued to benefit from strong demand in all geographical regions with a total of 15.1 million DSL lines delivered in 2003 (5.1 million during the fourth quarter). Fixed network solutions also had a strong revenue performance not only driven by gains in intelligent network applications but also Next Generation Network (NGN) solutions. Voice networks as well as optics turned in a good performance compared to the previous quarter due to the normal seasonality of these businesses. The IP service router activity also continued to gain momentum with seven new customers added during the quarter. MSWAN sales also benefited from a rebound, mainly in North America and Western Europe.

Income from operations increased to Euro 142 million compared with Euro 66 million in Q3 with a significant contribution coming from the broadband access and voice networks. The optical network results continue to improve thanks to on going cost cutting. The IP service router business continued to substantially invest in R&D to bring new products to the market, with many positive responses from major carriers in Asia, North America, and Europe.

Mobile communications

Fourth quarter revenue increased sequentially by 34.0% to Euro 1,092 million from Euro 815 million. Mobile networks once again turned in a good performance with growth continuing with greenfield operators. In addition to the increase in 2/2.5G, deployment in 3G accelerated during the quarter with 1,500 Node Bs deployed during the quarter. 2.9 million mobile phones were delivered during the quarter with a good reception of the new products. Mobile software (convergent payment, voice/data and prepaid/postpaid applications) as well as next generation data messaging software registered good growth.

Income from operations increased and represented an 11.2% return on sales at Euro 122 million compared to Euro 79 million in Q3. Overall mobile networks` profitability was in the high teens and mobile phones close to breakeven for the quarter.

Private communications

Fourth quarter revenue increased sequentially by 31.5% to Euro 1,103 million compared with Euro 839 million. The IP portion of the PBX business continued to grow and the enterprise solutions division confirmed its leadership in IP communications in Europe. Genesys turned in a good performance in North America as well as Western Europe and launched its next generation software platform for enterprises. The rail control systems activity registered substantial growth during the quarter and confirmed Alcatel as the undisputed leader in ETCS (European Train Control System). The integration and services business continued to gain momentum both in its outsourcing activity as well as in the private sector. The space division recorded strong growth during the quarter.

Income from operations was Euro 95 million compared to Euro 41 million in Q3. Significant contributions came from enterprise and transport solutions.

Taking into account that the Parent Company`s distributable profits are not sufficient enough to pay any dividends, the Board of Directors will propose to the Annual Shareholders Meeting not to pay any dividends to shareholders.

Alcatel will host an audio webcast at 1:00 p.m. Paris time (12:00 p.m. London and 7:00 a.m. New York), which can be accessed at http://www.alcatel.com/4q2003/ or http://www.alcatel.fr/4q2003.