Alcatel: Fourth Quarter and Full Year 1999 Results

1999 Advances Operating Income 28% and Builds Strong Momentum for 2000

Paris (pts010/04.02.2000/10:27)

Alcatel today reported its fourth quarter and full year 1999 results. For the full year, revenues amounted to EUR 23,023 million, an 8.3% increase over last year, with the Telecom related businesses increasing by 12%. Income from operations increased by 28% to EUR 1,275 million. Net income amounted to EUR 644 million, or EUR 3.44 per share ($0.69 per ADS).
Fourth quarter sales increased by 8.7% over Q4 98 to EUR 7,671 million and income from operations amounted to EUR 668 million. Net income amounted to EUR 338 million or EUR 1.79 per share ($0.36 per ADS).

Serge Tchuruk, CEO, said, "Fourth quarter and full year 1999 results have fully met our expectations. Our 1999 sales were driven by strong advances in optical and data networking activities, which together were up 36%, and momentum building up in our enterprise business, with sales growing more than 25%. Our operating profitability continued to improve significantly even though 1999 bore the cost of heavy technology investments.

With a strong order intake in 1999, we anticipate revenue growth in the mid-teens for our four telecom segments in 2000, while continued softness of energy cables markets may reduce the company's overall growth to the lower teens. We maintain our operating margin target of 6.5% for the full year 2000, which implies around a 30% growth in operating income. Historically, Alcatel has registered a negative operating income for the first quarter due to the seasonality of our business. However, for Q1 00 we are anticipating significant top line growth and an operating profit in the black for the group as a whole."

Fourth Quarter 1999 results (Unaudited)
Fourth quarter net sales amounted to EUR 7,671 million, an increase of 8.7% over fourth quarter 98, with order intake accelerating during the quarter. Income from operations increased to EUR 668 million representing a growth of 12% compared with Q4 98, which registered a very strong activity following a weak third quarter. Sequential sales and income from operations in the fourth quarter were significantly higher than in the third quarter 99 (+46% and +126% respectively), reflecting the traditional seasonality of business in Europe. Income before amortization of goodwill, taxes and purchased R&D amounted to EUR 972 million and included net financial expense of EUR 68 million, restructuring costs of EUR 162 million, and other revenue of EUR 534 million. Net income amounted to EUR 338 million.

Full Year 1999 results
1999 consolidated net sales increased by 8.3% to EUR 23,023 million. Europe accounted for 60.3% of net sales, the U.S., now Alcatel's largest single market, 18.4%, Asia 7.9%, and ROW 13.4%. Income from operations increased by 27.8% to EUR 1,275 million, representing an operating margin of 5.5%. Gross margin improved to 28.7% compared to 27.4% in 1998. R&D spending in the four Telecom activities increased by 21.8%, and was largely dedicated to the Internet and Optics segment. R&D spending for the group increased 16.6% or EUR 300 million over 1998. Income before amortization of goodwill, taxes and purchased R&D amounted to EUR 1,639 million and included EUR 181 million of net financial expenses, EUR 380 million of restructuring costs, and other revenue of EUR 925 million. Other revenue included a one-time pre-tax gain of EUR 386 million, resulting from the sale of Framatome, which was finalized at the end of 1999.

Net income amounted to EUR 644 million. A one-time charge of EUR 329 million for purchased R&D is included, resulting from the adoption of new French accounting standards, which have effected the accounting treatment for acquisitions, implemented in 1999. Gearing amounted to 19% at the end of 1999.

Networking
Good revenue growth in the U.S. networking activity with particularly strong access (Litespan) volume more than offset the softness in the legacy narrow-band switching and access business in Europe. Network applications showed significant growth confirming Alcatel's strong position in the intelligent network markets. The segment's profitability grew due to a good contribution from network applications and services and the turnaround of the mobile infrastructure business, which reached breakeven, as anticipated. 1999 was a year of investment in LMDS broadband radio systems, with a ramp-up in sales expected in 2000. It is also anticipated that network applications and services will be one of the main growth drivers for this year.

Internet and Optics
Significant advances in submarine and terrestrial transmission systems, as well as in broadband access, resulted in strong revenue growth for the Internet and Optics segment. Fourth quarter sales growth was adversely impacted by a substantial drop in the Space revenues compared with Q4 98 in which an exceptional level of billings had been registered. Excluding the satellite activity, revenues for the segment's other businesses grew by 36% in 1999.

Commercial deployment of ADSL in the U.S. during the year, and in Europe and Asia in the second half, led to a strong progression of revenues. Over 1.5 million lines were shipped worldwide during the year, of which more than 1 million to the U.S. This success in ADSL has also started to drive data networking sales. A considerable R&D investment in optical networking and in data carrier products caused a decrease in profitability for 1999. DWDM (40 channel) shipments began last year with a good ramp up expected for 2000. The 80 channel DWDM system has successfully completed acceptance testing and should be deployed in the next few months. Order intake for the segment was strong and growth trends are expected to continue in 2000 with ADSL booming and the optical business gaining momentum.

Enterprise and Consumer
Revenues grew substantially in 1999 in all of the segments' businesses, with a major contribution coming from evolving voice application solutions, particularly for enterprise call centers. PBX market share increased by 3.5 points in Europe, confirming Alcatel as the market leader. A focused acquisition strategy has resulted in Alcatel becoming a key player in the enterprise LAN switch market. Accordingly, at the beginning of this year, a full line of enterprise solution products was launched in the U.S. and Europe, led by the flagship product OmniPCX 4400, to address the emerging voice/data convergence market. In addition, 99 targets in the GSM handset business were met, with 11 million units sold representing over a 9% worldwide GSM market share in Q4.
Profitability targets were met and the segment's turnaround is now well underway.

Services led the improvement due to a continued move to high value added application and integration solutions and a management restructuring which has led to productivity gains. Profitability improved as volume increased in the PBX and call center businesses, while the integration of Xylan's data products allowed Alcatel to sell its own technology, reducing the resale activity, and improving results. Higher volume now reached in GSM handsets and the success of the dual band products has resulted in positive operating income. The segment is well positioned for further growth both in sales and operating profit for 2000.

Telecom Components
Sales growth in 1999 was satisfactory for the segment, with fiber optics being the main growth driver both for public and private networks and, in particular, submarine networks. A good increase was also registered in the LAN cabling business. High frequency components for cellular systems grew well in Europe, however, business in the U.S. market was less satisfactory. A good level of profitability was registered due to slightly improved margins.

Energy Cables
Revenues for the segment were flat year over year, reflecting principally the European industrial climate, which was not compensated by satisfactory growth in the U.S. The European cable market continued to decline with over capacity and strong pricing pressures. However, Q4 was marked by what could be considered as an upturn in the industrial trends.
Profitability continued to be significantly impacted by the lack of high voltage contracts putting a strain on margins. Intensive industrial restructuring is currently under way to react to these conditions.

Alcatel's Board of Directors will submit for the approval of the next Annual Shareholders' Meeting on May 16, 2000, the distribution of a net dividend of EUR 2.2 per share, representing EUR 3.3 per share including tax credit, a 10% increase over 1998. The global dividend payment amounts to EUR 423 million, an increase of 14.6% compared to last year. The payment date for the dividend will be May 18, 2000.

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements relating to the Company's expectations for sales and profitability for 2000. Such expectations assume that (i) current market trends in sales will not change and operating profits will continue to improve (ii) the Company will benefit from growth in the telecommunications market, (iii) the Company's sales volume will increase in several product markets, (iv) improvement will continue to occur in under-performing businesses, and (v) customer spending patterns will not change. Actual results could differ materially from the above as a result of these or other factors.

Contacts
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