Lucent Technologies Reports Results for Third Quarter of Fiscal 2005

MURRAY HILL, N.J., July 19 /PRNewswire-FirstCall/ -- Lucent Technologies today reported results for the third quarter of fiscal 2005, which ended June 30, 2005, in accordance with U.S. Generally Accepted Accounting Principles (GAAP). For the quarter, Lucent reported net income of $372 million or 7 cents per diluted share. These results compare with net income of $267 million, or 6 cents per diluted share, in the second quarter of fiscal 2005 and net income of $387 million, or 8 cents per diluted share, in the year-ago quarter.

The company recorded revenues of $2.34 billion in the quarter, essentially flat sequentially and an increase of 7 percent from the year-ago quarter. The company's revenues were $2.34 billion in the second quarter of fiscal 2005 and $2.19 billion in the year-ago quarter.

The third quarter's earnings per share included a positive impact of $127 million, or about 2 cents per diluted share, primarily due to the favorable impact of tax items and recoveries of bad debt and customer financing. These items and certain other significant items had positive impacts of $119 million, or about 2 cents per diluted share, in the second fiscal quarter, and $211 million, or about 4 cents per diluted share, in the year-ago quarter.(1)

EXECUTIVE COMMENTARY

"This quarter, we continued to deliver steady, profitable results driven primarily by our strength in 3G mobile networks and growth in our Services business," said Lucent Technologies Chairman and CEO Patricia Russo. "We believe our wireline business is stabilizing, and we continue to strengthen our position in the next-generation of IMS-based networks with more customer trials and developments.

"In April, we announced the formation of the Network Solutions Group (NSG) to improve our time to market and drive greater efficiency across the business. Over the last 90 days, we have made solid progress building on the collaboration that was already taking place in the business," said Russo. "We now have an organization and leadership team in place in NSG under Cindy Christy. We continue implementing common platforms for our IMS-based solutions, including our optical and data portfolios and in our next-gen access and applications businesses. We are also leveraging our R&D capabilities around the world.

"These actions contribute to our positioning for success in the key growth markets for next-generation networks," said Russo. "We continue to invest in the areas that are critical to our vision of converged services -- mobile high-speed data, broadband access, next-gen optical, VoIP, as well as services, the government sector and emerging markets. And we are increasingly focusing these investments in areas such as next-gen access for high-end video distribution like IPTV and revenue-generating applications for converged services."

Lucent Technologies Chief Financial Officer Frank D'Amelio confirmed the company's guidance for the fiscal year: "We continue to expect Lucent's annual revenues for fiscal 2005 to increase on a percentage basis in the mid-single digits, which we believe will be at about the market growth rate. We continue to focus on improving our productivity and managing our cost and expenses, while we build on new revenue and market opportunities for the business."

GROSS MARGIN AND OPERATING EXPENSES

Gross margin for the third quarter of fiscal 2005 was 45 percent of revenues as compared with 42 percent in the second quarter of fiscal 2005 and 43 percent in the year-ago quarter.

Operating expenses for the third quarter of fiscal 2005 were $681 million as compared with $707 million for the second quarter of fiscal 2005 and $598 million for the year-ago quarter.

BALANCE SHEET UPDATE

As of June 30, 2005, Lucent had about $4.1 billion in cash and marketable securities, flat sequentially from about $4.1 billion in the quarter ended March 31, 2005. During the quarter, Lucent used $318 million in cash for debt repurchases.

REVIEW OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2005

On a sequential basis, revenues in the United States increased $74 million, or 5 percent, and revenues outside the United States decreased $69 million, or 8 percent. Compared with the year-ago quarter, revenues in the United States increased $118 million, or 8 percent, and revenues outside the United States increased $32 million, or 4 percent.

Mobility Solutions(2)

Mobility revenues for the third quarter of fiscal 2005 were $1.17 billion, a decrease of 2 percent sequentially and an increase of 14 percent compared with the year-ago quarter.

In the third quarter, Lucent's Mobility business continued its momentum as a leading supplier of third-generation (3G) mobile networking solutions, and further strengthened its applications business:

-- Last week, Lucent announced a three-year agreement with MetroPCS valued at up to $500 million to provide 3G CDMA2000(R) equipment for new and existing markets across the United States. This agreement includes both CDMA2000 1X and CDMA2000 1xEV-DO technology. -- Lucent continued its momentum in the 3G CDMA2000 market, announcing new CDMA2000 1xEV-DO contracts with Mexico's Iusacell and Russia's Delta Telecom, as well as an agreement with Telecom New Zealand to expand its existing Lucent-supplied EV-DO network. -- Lucent also signed agreements with VIVO, Brazil's largest mobile operator, to increase the coverage and capacity of its CDMA2000 1X network and with Vietnam Power Telecom to expand its CDMA450 network to serve additional markets in Vietnam. -- Lucent also enhanced its Bell Labs-developed applications portfolio in the third quarter, introducing a series of new IMS-based "blended lifestyle" services, including an advanced personal directory service (Active PhoneBook), personalized location-based services (iLocator) and peer-to-peer streaming video conference sessions. These services combine voice, video and data capabilities and can be delivered on both wireless and wireline networks. Integrated Network Solutions (INS)(2)

INS revenues for the third quarter of fiscal 2005 were $592 million, essentially flat sequentially and a decrease of 12 percent compared with the year-ago quarter.

Lucent continued to announce agreements focused on key technologies that are most important for next-generation networks, including next-gen optical, voice over Internet protocol (VoIP) and broadband access.

-- In optical, Lucent was awarded contracts with Guangdong Telecom in China, Essent Kabelcom in the Netherlands, Heisei DenDen in Japan, Dreamline in Korea and Toronto Hydro Telecom. These various optical transport wins help build or enhance the capacity of optical transport networks through the deployment of LambdaUnite(R) MultiService Switches, Metropolis(R) ADM Multiservice Multiplexers, Metropolis(R) DMX and DMXtend Access Multiplexers, and Navis(R) network management software. -- Lucent announced five VoIP wins for the new Lucent Compact Switch, part of Lucent's Accelerate(TM) Next-Generation Communications Solutions portfolio, with Industry Telephone, Lakedale Telephone, CMC Telecom, Midwest Wireless and Fonix Telecom. In addition, Lucent will supply its VoIP for Enterprises solution to Dacom, one of Korea's leading service providers, to help offer IP services to large enterprise customers. -- In broadband access, Lucent announced agreements with Club Internet, the French arm of Deutsche Telekom's T-Online Internet Service Provider division, Telefonica Brazil and Tele2 in Austria, for advanced broadband services, including video on demand and high-speed Internet connections. In addition, Telefonica de Espana added its 40,000th subscriber for its IPTV service, Imagenio, which is based on Lucent's Stinger(R) DSLAM portfolio. -- Lucent also was selected by BT as a preferred supplier of core IP routing platforms and will provide network integration, deployment and maintenance support for one of the world's largest infrastructure upgrades, BT's 21st century IP network. Lucent also announced an agreement with Kazakhtelecom to provide a broadband Ethernet solution to deliver data services to business and residential customers in three cities in Kazakhstan. LUCENT WORLDWIDE SERVICES (LWS)

LWS revenues for the third quarter of fiscal 2005 were $538 million, an increase of 8 percent sequentially and an increase of 14 percent compared with the year-ago quarter.

LWS continues to focus on broadening its business and leveraging its network integration and multivendor capabilities with new deployment, maintenance and professional services wins, as well as contributions to several other major contracts:

-- LWS solutions were components of 25 contract announcements this quarter, including most notably a nine-year $187 million managed services contract with Capgemini Energy, a limited partnership between TXU and Capgemini, to provide a full scope of network consulting, design and management services for TXU's infrastructure. LWS also announced its first hosted messaging services contract with Choice One Communications. -- Among these announcements were also several contracts with wireless services components, including radio frequency network optimization contracts with provincial subsidiaries of China Mobile and China Unicom, an expansion contract with Telecom New Zealand to provide managed services for its CDMA2000(R) 1xEV-DO network, and a contract with Vietnam Power Telecom to provide engineering, installation, testing, optimization, program management and training services for its Phase II CDMA450 network expansion project. -- Services wins also included contracts in the government sector to provide network integration and professional services for communications infrastructure upgrades at U.S. Army installations in North America and Europe, and with the U.S. Navy's SeaPort-e program where the Lucent team can provide network engineering, integration, installation, deployment, managed services and program management support services. -- Lucent also entered into several alliances, including a global strategic alliance with Capgemini to deliver best-in-class services to governments, enterprises and telecommunications markets worldwide, and alliances with Orca Interactive to enhance Lucent's IPTV solution, and with BayPackets to enhance Lucent's IMS solution.

The quarterly earnings conference call will take place today at 8:30 a.m. Eastern Daylight Time and be broadcast live over the Internet at http://www.lucent.com/investor. It will be maintained on the site for replay through Tuesday, July 26, 2005.

Lucent Technologies designs and delivers the systems, services and software that drive next-generation communications networks. Backed by Bell Labs research and development, Lucent uses its strengths in mobility, optical, software, data and voice networking technologies, as well as services, to create new revenue-generating opportunities for its customers, while enabling them to quickly deploy and better manage their networks. Lucent's customer base includes communications service providers, governments and enterprises worldwide. For more information on Lucent Technologies, which has headquarters in Murray Hill, N.J., USA, visit http://www.lucent.com/.

This news release contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, the industries in which we operate, our beliefs and our management's assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks" and "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict or assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties include: fluctuations in the telecommunications market; our ability to compete effectively; our product portfolio and ability to keep pace with technological advances in our industry; our reliance on a limited number of key customers; our exposure to the credit risk of our customers; the pricing, cost and other risks inherent in our long-term sales agreements; the costs and risks associated with our pension and postretirement benefit plans; the social, political and economic risks of our foreign operations; our reliance on third parties to manufacture most of our products; our ability to generate positive cash flow; existing and future litigation; our ability to protect our intellectual property rights and the expenses we may incur in defending such rights; the complexity of our products; changes to existing regulations or technical standards; changes in environmental health and safety laws; and our ability to retain and recruit key personnel. For a further list and description of such risks and uncertainties, see the reports filed by us with the Securities and Exchange Commission. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this news release, whether as a result of new information, future events, changes in assumptions, or otherwise.

(1) Details on the significant items impacting results are available in Exhibit E in the accompanying financial reporting package. (2) Recent organizational changes related to combining our mobility and wireline businesses into a single unit, called the Network Solutions Group, were announced on April 19, 2005. These changes are in the process of being implemented and may impact our current reportable segment structure in the future. Lucent Technologies Inc. and Subsidiaries Index to Exhibits Exhibit A Consolidated statements of operations for the three months ended June 30, 2005, March 31, 2005 and June 30, 2004 and the nine months ended June 30, 2005 and June 30, 2004 Exhibit B Consolidated balance sheets as of June 30, 2005, March 31, 2005 and September 30, 2004 Exhibit C Consolidated statements of cash flows for the three months ended June 30, 2005, March 31, 2005 and December 31, 2004 and the nine months ended June 30, 2005 and June 30, 2004 Exhibit D Segment and product information and reconciliation of basic to diluted EPS Exhibit E Summary of significant items impacting results Exhibit A LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited; amounts in millions, except per share amounts) Three months ended Nine months ended June 30, March 31, June 30, June 30, June 30, 2005 2005 2004 2005 2004 REVENUES Products $1,802 $1,836 $1,717 $5,453 $5,225 Services 538 499 473 1,557 1,418 Total revenues 2,340 2,335 2,190 7,010 6,643 COSTS Products 909 980 903 2,850 2,766 Services 379 380 340 1,149 1,073 Total costs 1,288 1,360 1,243 3,999 3,839 Gross margin 1,052 975 947 3,011 2,804 Gross margin % 45% 42% 43% 43% 42% OPERATING EXPENSES Selling, general and administrative, before recovery of bad debts and customer financings 441 434 381 1,271 1,136 Recovery of bad debts and customer financings (53) (11) (90) (75) (203) Selling, general and administrative 388 423 291 1,196 933 Research and development 287 292 334 858 951 Business restructuring 6 (8) (27) (1) (15) Total operating expenses 681 707 598 2,053 1,869 Operating income 371 268 349 958 935 Other income (expense), net 52 43 128 49 35 Interest expense 85 85 94 259 304 Income before income taxes 338 226 383 748 666 Income taxes (34) (41) (4) (65) (127) Net income 372 267 387 813 793 Conversion expense - 8.00% redeemable convertible preferred stock - - - - (1) Preferred dividends and accretion - - - - 12 Net income applicable to common shareowners $372 $267 $387 $813 $804 Basic earnings per share applicable to common shareowners $0.08 $0.06 $0.09 $0.18 $0.19 Diluted earnings per share applicable to common shareowners $0.07 $0.06 $0.08 $0.17 $0.17 Weighted average number of common shares outstanding - basic 4,433 4,421 4,288 4,419 4,241 Weighted average number of common shares outstanding - diluted 5,326 5,047 5,097 5,039 4,822 Exhibit B LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited; amounts in millions, except per share amounts) June 30, March 31, September 30, 2005 2005 2004 Assets: Cash and cash equivalents (a) $1,724 $1,967 $3,379 Marketable securities (a) 373 798 858 Receivables, less allowances of $88, $98 and $110, respectively 1,309 1,544 1,359 Inventories 911 882 822 Other current assets 1,671 1,615 1,813 Total current assets 5,988 6,806 8,231 Marketable securities (a) 2,039 1,342 636 Property, plant and equipment, net 1,284 1,302 1,376 Prepaid pension costs 5,847 5,684 5,358 Goodwill and other acquired intangibles, net 423 427 434 Other assets 856 856 928 Total assets $16,437 $16,417 $16,963 Liabilities: Accounts payable $769 $738 $872 Payroll and benefit-related liabilities 884 828 1,232 Debt maturing within one year - - 1 Other current liabilities 1,818 1,855 2,361 Total current liabilities 3,471 3,421 4,466 Postretirement and postemployment benefit liabilities 4,893 4,878 4,881 Pension liabilities 1,566 1,668 1,874 Long-term debt 4,462 4,722 4,837 Liability to subsidiary trust issuing preferred securities 1,102 1,152 1,152 Other liabilities 1,013 1,055 1,132 Total liabilities 16,507 16,896 18,342 Commitments and contingencies Shareowners' deficit: Common stock (b) 45 44 44 Additional paid-in capital 23,481 23,433 23,005 Accumulated deficit (19,980) (20,352) (20,793) Accumulated other comprehensive loss (3,616) (3,604) (3,635) Total shareowners' deficit (70) (479) (1,379) Total liabilities and shareowners' deficit $16,437 $16,417 $16,963 (a) Cash and cash equivalents and marketable securities amounted to $4,136, $4,107 and $4,873 as of June 30, 2005, March 31, 2005, and September 30, 2004, respectively. (b) $0.01 per share par value; 10,000 authorized shares; 4,454 issued and 4,444 outstanding as of June 30, 2005; 4,437 issued and 4,427 outstanding as of March 31, 2005; 4,396 issued and 4,395 outstanding as of September 30, 2004. Exhibit C LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; $ in millions) Nine Three months ended months ended June 30, March 31, Dec. 31, June 30, June 30, 2005 2005 2004 2005 2004 Operating Activities Net income $372 $267 $174 $813 $793 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 147 145 165 457 517 Recovery of bad debts and customer financings (53) (11) (11) (75) (203) Deferred income taxes 8 (21) - (13) (12) Pension credit (244) (244) (242) (730) (831) Other adjustments for non-cash items 42 22 95 159 155 Changes in operating assets and liabilities: Receivables 278 (236) 86 128 15 Inventories and contracts in process (34) (24) 1 (57) (245) Accounts payable (4) (58) (93) (155) (85) Deferred revenue (4) 219 (107) 108 349 Other operating assets and liabilities (132) (411) (392) (935) (158) Net cash (used in) provided by operating activities 376 (352) (324) (300) 295 Investing Activities Capital expenditures (68) (43) (34) (145) (94) Maturities, sales and purchases of marketable securities (263) 33 (695) (925) (834) Other investing activities 1 - - 1 57 Net cash used in investing activities (330) (10) (729) (1,069) (871) Financing Activities Net proceeds of short-term borrowings - - - - 9 Repayments of long-term debt (318) (80) (21) (419) (309) Issuance of common stock 36 30 55 121 236 Repayments of preferred stock - - - - (21) Other financing activities - 6 (2) 4 6 Net cash (used in) provided by financing activities (282) (44) 32 (294) (79) Effect of exchange rate changes on cash and cash equivalents (7) (8) 23 8 20 Net (decrease) increase in cash and cash equivalents (243) (414) (998) (1,655) (635) Cash and cash equivalents at beginning of period 1,967 2,381 3,379 3,379 3,821 Cash and cash equivalents at end of period $1,724 $1,967 $2,381 $1,724 $3,186 Exhibit D LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES SEGMENT AND PRODUCT INFORMATION (Unaudited; $ in millions, except per share amounts) Nine Three months ended months ended June 30, March 31, June 30, June 30, June 30, 2005 2005 2004 2005 2004 Total Revenues Mobility Solutions (Mobility) $1,172 $1,202 $1,028 $3,526 $2,961 Integrated Network Solutions (INS) 592 589 673 1,826 2,178 Lucent Worldwide Services (Services) 538 499 473 1,557 1,418 Other 38 45 16 101 86 Total revenues $2,340 $2,335 $2,190 $7,010 $6,643 U.S. Revenues Mobility $881 $879 $780 $2,615 $2,108 INS 284 258 340 823 1,098 Services 320 267 269 882 783 Other 38 45 16 102 85 Total U.S. revenues $1,523 $1,449 $1,405 $4,422 $4,074 Non-U.S. Revenues Mobility $291 $323 $248 $911 $853 INS 308 331 333 1,003 1,080 Services 218 232 204 675 635 Other - - - (1) 1 Total non-U.S. revenues $817 $886 $785 $2,588 $2,569 Operating income Mobility $406 $404 $339 $1,200 $867 INS 64 (12) 61 75 344 Services 99 57 77 230 197 Total segment income 569 449 477 1,505 1,408 Recovery of bad debts and customer financings 53 11 90 75 203 Business restructuring (6) 8 27 1 15 Other (245) (200) (245) (623) (691) Total operating income $371 $268 $349 $958 $935 Products and Services Revenues Wireless $1,172 $1,202 $1,028 $3,526 $2,961 Voice networking 200 203 274 645 897 Data and network management 197 221 254 618 701 Optical networking 195 165 145 563 580 Services 538 499 473 1,557 1,418 Other 38 45 16 101 86 Total revenues $2,340 $2,335 $2,190 $7,010 $6,643 * Segment information for periods prior to fiscal 2005 was reclassified to conform to the current period's presentation. Reconciliation of basic to diluted EPS: Nine Three months ended months ended June 30, March 31, June 30, June 30, June 30, 2005 2005 2004 2005 2004 Net income $372 $267 $387 $813 $793 Conversion cost - 8.00% convertible securities - - - - (1) Preferred stock dividends and accretion - - - - 12 Net income applicable to common shareowners - basic $372 $267 $387 $813 $804 Adjustment for dilutive securities on net income: 7.75% convertible securities (1) - - 1 - 2.75% convertible securities 11 11 11 34 34 8% convertible securities 11 - 17 - - Net income applicable to common shareowners - diluted $393 $278 $415 $848 $838 Weighted average number of shares outstanding - basic 4,433 4,421 4,288 4,419 4,241 Effect of dilutive securities: Stock options 49 62 76 62 76 Warrants 1 28 - 14 - 7.75% convertible securities 10 - - 10 - 2.75% convertible securities 622 536 498 534 505 8% convertible securities 211 - 235 - - Weighted average number of shares outstanding - diluted 5,326 5,047 5,097 5,039 4,822 EPS: Basic $0.08 $0.06 $0.09 $0.18 $0.19 Diluted $0.07 $0.06 $0.08 $0.17 $0.17

Certain securities have been excluded from the above calculations from all periods presented because the effect of adjusting net income for the related interest and the number of common shares for which they would be converted or redeemed was antidilutive.

Exhibit E LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ITEMS IMPACTING RESULTS (Unaudited; $ in millions, except per share amounts) Three months ended June 30, March 31, June 30, 2005 2005 2004 Shareowner settlement $17 $ - $72 Recovery of bad debts and customer financings 53 11 94 Business restructuring (6) 8 27 Early extinguishment of debt obligations (5) (3) (1) Discrete income tax items 68 103 19 Total $127 $119 $211 Per share impact - basic $0.03 $0.03 $0.05 Per share impact - diluted $0.02 $0.02 $0.04 The above significant items impacting results were reflected in: Operating expenses $47 $19 $117 Other income (expense), net 24 45 79 Income taxes 56 55 15 Net income $127 $119 $211