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Alcatel-Lucent Reports Q4 2015 Results
 
Alcatel-Lucent delivered a record set of results for Q4 2015 reflecting a relentless focus on execution, as the Group prepares to combine with Nokia, as well as benefitting from a very high level of activity at the end of the year.
 
Commenting on the results, Philippe Camus, Chairman and CEO of Alcatel-Lucent, said: “Our Q4 results demonstrate best-in-class execution, enabling us to close the Shift journey with the pride of having accomplished what we had committed to. Until the very last day of the quarter, the organization showed relentless dedication leading to the fulfillment of the major goals of The Shift Plan, the most emblematic being free cash flow positive and reaching Euro 950 million of cumulative fixed costs savings. I would like to thank all our employees for such an achievement and our customers for their trust. Based on this success, the Group has now embarked on the next chapter of its story with Nokia and will continue to deliver value as part of a global leader in technology and services for an IP connected world.”
 
Highlights of The Shift Plan
 
- The Shift Plan was launched in June 2013 with the triple ambition of repositioning the Group from a telecom equipment generalist to a specialist in IP, cloud and ultra-broadband technologies, re-establishing competitiveness and restoring a sound balance sheet. The release of Q4 and Full-Year 2015 results demonstrate the success of this turnaround.
 
-  KPIs of the Plan fulfilled:
 
o   Free Cash Flow: the target of being free cash flow positive in 2015 was largely exceeded with inflows of Euro 660 million for the year as a whole. This compares to an outflow of Euro (668) million in 2012.
 
o   Fixed Cost savings: the target of Euro 950 million cumulative fixed costs savings was surpassed with an actual realization of Euro 1,031 million.
 
o   Core Networking segment: revenues totaled Euro 6,780 million and adjusted operating margin reached 10.0% in 2015, consistent with the revised objectives. In 2012, Core Networking revenues were Euro
 
o   6,180 million and adjusted operating margin was 2.3%.
 
o   Access segment: operating cash flow reached Euro 627 million for 2015, largely exceeding the Shift Plan target of Euro 200 million. In 2012, Access segment cash flow was (105) million.
 
- The Group successfully repositioned itself as a leader in IP, Cloud and Ultra-broadband technologies, as evidenced by the growing share of next-generation technologies which, from around half of revenues in 2012, represented 77% in 2015, growing at a double-digit pace on average over the period. At the same time, the share of R&D spending into next-generation technologies expanded from 67% in 2012 to 87% of total R&D in 2015.
 
- The Group operating model now allows for a cost structure that is aligned with peers and a lower breakeven point, primarily through sales and marketing efficiency, R&D resources allocation, and procurement 
optimization. Gross margin moved up from 29.1% in 2012 to 36.0% in 2015, gaining nearly 7 percentage points over the period, while adjusted operating margin expanded by 9 percentage points from (1.8%) in
 2012 to 7.2% in 2015. This represents an improvement of nearly Euro 1.3 billion in operating income throughout the period.
 
- Substantial decrease of our pension risk exposure in the Group’s US pension plan liabilities notably as a result of the previously announced lump sum offer, which stood at US$ 21.7 billion at the end of 2015 compared to US$ 30.0 billion at the end of 2012, despite the negative impact of new mortality tables over the period.
 
- Lastly, the Group completed its refinancing as soon as 2014. In less than a year, the debt was reprofiled, maturity lengthened and cash interest costs reduced. At the end of 2015, the Group had a net cash position of Euro 1,409 million compared to a net debt position of Euro (794) million at the end of Q2 2013.
 
Highlights of Q4 2015
- Group revenues, excluding Managed Services and at constant perimeter, increased 15% year-on-year, with strong growth in next-generation revenues, which were up 36%. At constant exchange rates, Group revenues increased 6% while next-generation revenues were up 26%. The weight of next-generation revenues continued to progress, representing 79% of revenues compared to 67% in the year-ago quarter.
 
- Gross margin expanded to its highest-level since the Alcatel-Lucent merger, at 39.4%, an increase of 470 bps year-on-year, driven by improved profitability in certain business lines and a very high level of activity at the end of the year, composed notably of a high proportion of software sales. On a more normalized basis, gross margin for the quarter would have been lower by a few percentage points though still substantially above the level of Q4 2014.
 
- Adjusted operating income totaled Euro 560 million, or 13.5% of revenues, compared to Euro 284 million in the year-ago quarter, or 7.7% of revenues. The substantial increase in adjusted operating margin reflects the improvement in gross margin and relatively lower operating expenses. Profitability of our Core Networking segment improved slightly compared to the year ago quarter to reach an adjusted operating margin of 16.3% while our Access segment set a new record with an adjusted operating margin of 11.8% compared to 0.3% in the year-ago quarter.
 
- As reported, Group share of net income amounted Euro 589 million or Euro 0.21 per share. Excluding Nokia transaction related costs, Group share of net income was Euro 659 million for the fourth quarter compared to Euro 271 million in the year-ago period. The improvement compared to the year-ago quarter mainly stems from improved adjusted operating income as well as the recognition of the positive impact of the US pension lump-sum offer, as described in our Q3 results report. The successful completion of such lump-sum pension offer to US retirees resulted in an actual increase in US pension surplus of US$ 449 million which was recognized in Q4. This was partially offset by an increase in financial expense of Euro 62 million largely as a result of mark-to-market of certain positions.
 
- Free cash flow excluding transaction related costs was Euro 1,020 million, the highest level ever recorded since the Alcatel-Lucent merger. In addition to stronger profitability, free cash flow performance reflects continued efforts to tightly manage working capital, with a particular focus on reducing inventories and overdues, and the ability to rapidly monetize revenues recorded at the end of the year.
 
Highlights of 2015
- Group revenues, excluding Managed Services and at constant perimeter, increased 10% year-on-year, driven by notable strength in next-generation revenues, which grew 24%. At constant exchange rates, Group revenues were down 2%, while next-generation revenues were up 11%. The weight of next-generation revenues continued to progress, representing 77% of revenues compared to 67% last year.
 
- Gross margin reached 36.0% of revenues, an increase of 260 bps year-on-year.
 
- Adjusted operating income totaled Euro 1,029 million, or 7.2% of revenues, compared to Euro 623 million in 2014, or 4.7% of revenues. Our Core Networking segment reached an adjusted operating margin of 10.0%, a slight decrease compared to 2014 but on substantially higher revenues, while our Access segment adjusted operating margin increased 510 bps year-over-year to 5.7%.
 
- In 2015, the Group’s income tax benefit showed a substantial decrease compared to 2014, reflecting the increase in deferred tax assets in 2014 as a result of the improvement of the profitability of the Group as part of the Shift Plan.
 
- At December 31, 2015, the Group’s overall Pensions and OPEB exposure indicated a deficit of Euro 1,271 million compared to a deficit of Euro 1,350 million as of December 31, 2014 (in each case before taking into account applicable asset ceilings). In addition, there was a substantial decrease in the Group’s US pension plan liabilities as a result of the previously announced lump sum offer, which stood at US$ 21.7 billion at the end of 2015 compared to US$ 29.5 billion at the end of 2014. The US qualified pension plans surplus, as a result of the lump sum offer, has increased by US$ 449 million to reach US$ 2.4 billion, or 11.1% of liabilities, compared to US$ 2.0 billion, or 7.2% of liabilities, immediately prior to the offer.
 
- As reported, the Group showed a net income (Group share) of Euro 257 million in 2015, or Euro 0.09 per share, compared to a net loss of Euro (118) million in the year-ago period.
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