Second quarter 2008 revenue in line with guidance - Full year 2008 outlook confirmed

During the quarter, revenues declined 5.2% year-over-year and increased 6.1% sequentially to Euro 4.101 billion. At constant Euro/USD exchange rate, revenues grew 1.7% year-over-year and 8.5% sequentially. At constant exchange rate and on a year-over- year basis, Carrier revenues declined 3%, Enterprise revenues grew 7% and Services revenues grew 16%. The adjusted2 gross margin was 34.9% of revenues, of which 0.5- percentage point was due to a capital gain on the sale of real estate. Adjusted2 operating income1 was Euro 93 million or 2.3% of revenues.

During the second quarter of 2008, the CDMA activity declined at a higher pace than the company had planned. This was due, to a large extent, to a strong reduction in the capital expenditure of a key customer in North America. Although there are new opportunities in other geographic areas, the uncertainty regarding spending in North America has led the company to take more cautious mid-term assumptions in this activity. This has resulted in a goodwill impairment charge of Euro (810) million which is reflected in the reported net loss of Euro (1,102) million or Euro (0.49) per diluted share for the second quarter.

Patricia Russo, CEO commented:

“Looking beyond the non-cash impairment charge, operationally we made good progress against our turnaround plan in the second quarter, delivering top-line and an adjusted operating margin in line with our expectations.

First, revenue performance came in at the higher end of our guidance, posting sequential growth of slightly more than 6%. We were able to fully absorb the material decline in CDMA, achieving year-over-year growth of close to 2% at constant Euro/USD exchange rate, thanks to the strong growth of our Enterprise and Services operating segments and good performance in most of our other carrier activities. Of particular note, GSM/W- CDMA/WiMAX continued to enjoy strong, double-digit growth year-over-year. In addition, our activities in convergence grew for the first time since completing the merger and we saw slight growth in our wireline activities.

Second, our adjusted gross margin is in the mid thirties, which is in line with our overall guidance for the year. Factoring out the impact of one-time gains, our gross margin increased by 150 basis points year-over-year, reflecting a more stringent pricing discipline and the impact of our product costs reduction programs. Sequentially, it declined 90 basis points, in spite of higher volumes, reflecting to a large extent a negative shift in the product and geographic mix.

Finally, we continue to make good progress in reducing our fixed costs. Our operating expenses declined 8.6% year-over-year and 1.7% sequentially. As a result, we achieved higher adjusted operating margins in all three business segments, with break-even performance in the carrier segment and high single-digit operating margins in the Enterprise and Services segments”.

Reported results

For the second quarter 2008, Alcatel-Lucent’s reported revenues amounted to Euro 4,101 million. The reported gross profit was Euro 1,432 million. Reported operating loss1 was Euro (21) million, including the negative impact from PPA entries of Euro (114) million. For the quarter, reported net loss (group share) was Euro (1,102) million or Euro (0.49) per diluted share (USD (0.77) per ADS), including the negative after tax impact from PPA entries of Euro (880) million.

Adjusted results

In addition to the reported results, Alcatel-Lucent is providing adjusted financial results in order to provide meaningful comparable information, which exclude the main non-cash impacts from PPA entries in relation to the Lucent business combination. These non-cash impacts are very material and non-recurring due to the different amortization periods depending on the nature of the adjustments, as detailed in the annex. Reported figures are not comparable with our main competitors and many business players who have not undergone any similar business combinations as the Alcatel and Lucent one.

For the second quarter 2008, Alcatel-Lucent generated revenues of Euro 4,101 million, compared to Euro 4,326 million in the year-ago quarter, a decrease of 5.2%. The adjusted2 gross profit was Euro 1,433 million or 34.9% of revenues, compared to an adjusted2 gross profit of EUR 1,447 million or 33.4% of revenues in the year ago- quarter. Adjusted2 operating income1 was Euro 93 million, 2.3% of revenues, compared with an adjusted2 operating loss of Euro (19) million or (0.4%) of revenues in the year- ago quarter. Adjusted2 net loss (group share) was Euro (222) million or Euro (0.10) per diluted share (USD (0.16) per ADS), compared to an adjusted2 net loss of Euro (336) million or Euro (0.15) per share (USD (0.20) per ADS) in the year-ago quarter.

Balance sheet and pension status

The net (debt)/cash position was Euro (415) million as of June 30, 2008, compared with Euro (30) million as of March 31, 2008. The increase in net debt of Euro (385) million primarily reflects an increase in non operating working capital requirements mainly related to the bonus payments which were concentrated in the second quarter, cash outflow related to restructuring plans (Euro (166) million), our cash contribution to pensions (Euro (112) million) and a slightly higher-than-anticipated cash income tax payment (Euro (48) million). Based on the above outlook for revenue and adjusted operating margin, Alcatel-Lucent expects its year-end 2008 net debt to be materially reduced compared to the level at the end of June 2008.

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