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Alcatel Lucent SA (NYSE:ALU)

Q12013 Earnings Call

April 26, 2013 7:00 am ET

Executives

Michel Combes - Chief Executive Officer

Paul Tufano - Executive Vice President, Chief Operations Officer, Chief Financial Officer and Member of the Executive Committee

Analysts

Alexander Peterc - Exane BNP Paribas

Kai Korschelt - Deutsche Bank

Francois Meunier - Morgan Stanley

Gareth Jenkins - UBS

Vincent Maulay - Oddo Securities

Simon Schafer - Goldman Sachs

Sandeep Deshpande - JPMorgan

Achal Sultania - Credit Suisse

Simon Leopold - Raymond James

Didier Scemama - Merrill Lynch

Sebastien Sztabowicz - Landsbanki Keppler

Eric Beaudet - Natixis Securities

Richard Kramer - Arete Research

Operator

Welcome to the Alcatel Lucent Q1 financial results audio webcast. We leave the floor to Michel Combes. Please go ahead, sir.

Michel Combes

Good afternoon or good morning for, let's say, all of you. I am Michel Combes, the new CEO of Alcaltel-Lucent. I am here with Paul Tufano, our CFO, that, obviously, you all know. Just, let's say, to start with just would like to, of course, let you know that I have spent the last few weeks listening to customers, employees, external stakeholders and I am actively reviewing the group business (inaudible) operating model to elaborate the plan for our continued turnaround going forward.

I look forward, as I have told on different occasions, to sharing this plan in early summer with all of you. Meanwhile, today, I would like to let Paul presenting the results of the first quarter where, let's say, you will see the company has been really at work to embrace and deliver an underlying which were presented by Paul in the previous months.

So, Paul, floor is yours.

Paul Tufano

Thank you, Michel. Good afternoon, ladies and gentlemen. If you were to look at the quarter overall, I guess the thing that you would say is continuous improvement and that we are continuing to execute on our performance program. Let me remind you that there were three pillars to our performance program.

The first was to drive revenue mix, products that are above the corporate average and gross margin. The second was to drive expense reduction and achieve $1.25 billion, cost expense reduction over the two-year period of 2012 and 2013, and lastly to stabilize our balance sheet.

I think over the course of first quarter, we continue to make progress along each of these areas. If you look at our business, overall, we are seeing some rising trends. Our overall revenue in constant currency was 120% in the first quarter. We had a book-to-bill of 1.03, and backlog stands slightly below €9 billion. It is up 4% quarter-on-quarter and we see good growth across majority of our businesses.

In addition, and we are making progress on the Performance Program. In the third quarter of 2013, we were able to reduce approximately €100 million of cost and expense from the previous period in 2012, but despite that progress in those areas, we do have work to do on cash flow. As you see from the quarter, the one disappointing area was negative cash flow at €530 million I'll spend more detail talking about that. That was primarily due to an increase of cost for payment and restructuring, but more importantly some deferrals working capital.

If you look at progress on cost savings, during the course of the quarter, we made progress in both, our fixed cost and expense savings as well as our variable cost savings. Fixed cost and expense is approximately €55 million better than the quarter period a year ago, with the majority of the reduction coming from SG&A.

In variable cost, which is our installation commissioning and support services costs, we are down approximately €45 million that equally split between third-party negotiations and productivity and transformation. Overall, if you look at the total workforce for Alcatel-Lucent, we are down approximately 5,400 headcount from year end of 2012. Almost, 3,200 of that is for managed services as a result of renegotiating or exiting contracts and the non-managed service workforce is down about 2,200 headcount, a fair amount of which is in the indirect line especially SG&A, and I will go through that in a little bit more detail as we go through of course the presentation.

We are head of our performance plan and you will see us attempt to drive even further expense reduction ahead of that plan. Now, look at the KPIs for our businesses and when we presented our year-end results about 90 days ago, we said we would give you indicators on the progress we are making in our business and we are attempting to do that here today.

If you look at our IP product line which is the key to driving improved probability, we had 9% overall growth in IT year-on-year. We had a successful launch of our core router, we have now eight customers on the core router, but two additional wins over the course of this quarter. We have launched our new SDN software defined network products early in the quarter. And as I look at the overall revenue contribution of IPD to the total group, it's approximately 16%, which is up 200 basis points from a year ago and 100 basis points from the fourth quarter, so continued growth in IPD, which you know carries an above average margin for the overall corporation.

In Optics, our 1830 platform continues to grow. It is now at 36% of our all optics hardware revenue that is up dramatically from the first quarter of '12, where it's added only about 15% and we are seeing good growth in 100-gigabit volume shipments in the mix of capacities, and today 19% of our total shipments are at 100-gigabit and that is up dramatically from the both, the first quarter and the fourth quarter of 2012.

Wireless continues to do well. We are seeing good growth, especially coming out of North America this quarter and our wireless LTE revenue is the highest level it has even been. Fixed networks continues to be a bright spot. While you can see we had that 10% year-on-year revenue growth, both copper and fiber shipments are in excess of 25% year-on-year. We are having success with our vectoring, our VDSL2 products, where we shipped our one millionth LAN card this quarter and more importantly where we have 40 trials on vectoring currently globally. With 20 of them in EMEA and 20 in the rest of the world.

Finally for managed services. I am very pleased to report that managed services had a significant impact positively this quarter. There is positive € 65 million swing in profitability, year-over-year. We have been able to address 10 of the 15 managed service contract that we highlighted to you when we announced the performance program in July of last year.

If you turn to the reported results. From an IFRS standpoint, at fully reported net income, you can see that the group lost € 353 million for the quarter, € 0.16 per share. If I were to look at the two major things that are driving the quarter, you can see that restructuring is €122 million in charge. This is up approximately €75 million year-on-year. It is a result of our fixed cost and expense reduction activity in our reduction plans around the world. The predominance of that €75 million growth is in social costs.

I would also point out that this quarter we implemented IAS19 on employee benefits. We have been disclosing this over the course of the last of four quarters but for those you don’t know, IAS19 has changed the way you have to match the liability rate and the expected rate of return on your pensions. In the past, we would use the discount rate for liabilities and we would use our expected rate of return and the differences buff in financial income. Today we are now required under IAS19 to use the same rate, the discount rate for liabilities as well as expected rate of return. That change affected the overall P&L by €190 million this quarter.

If I now turn to the adjusted operating profit line, you can see that, in the quarter, we generated or posted €3.2 billion of revenue and an adjusted operating profit loss of €107 million. From a revenue standpoint, that reported rate, you see us growing at 0.6%. When you adjust for currencies, it is 1.8% positive with a strong contribution by North America at 16% year-on-year.

Our gross margin is at 29.4%, 80 basis points lower than a year before period and a full 100 basis points lower than the fourth quarter. If we look at the drivers of the gross margin erosion, year-on-year, this is exclusively product mix that is affecting the impact. If you remember correctly, in the first quarter of 2012, we still had a very large amount of shipments of legacy 2G and 3G products. That is the primary driver of the delta. It is offset by little better volume and more importantly cost and expense reduction year-on-year. Quarter-on-quarter, the impact of 100 basis point reduction as well due to volume offset by reductions in fixed cost and expense.

If I turn to the expense lines, you can see that our operating expenses are down about 5.5% year-on-year. When you adjust for currency, that is 5%, and in that SG&A is 11.3% down, year-on-year. You can note that we had a slight increase in R&D this quarter over the fourth quarter. That is additional investment for advanced technologies in a few of our product lines to keep innovation going.

If I now turn to our fixed cost and expense summary, you can see the dramatic change for the first quarter '11 and the first quarter '13. If I give you the calibrations from the first quarter '12 to the first quarter of '13, there is approximately €55 million reduction as we said before about 4%. €39 million of that is coming from our SG&A reductions. Infrastructure is also down by 7, and you can see it's also savings some growth in gross R&D.

From a headcount standpoint as I said before, we had shed 5,400 overall headcount. When you just look at the indirect headcount, it is down about 2,017 people with SG&A being a little less than half of that amount and you will see us continue to reduce our headcount as we go through the course of the next three quarters.

Turning to the breakdown of revenue by our operating segments, I am very pleased to report that networks and platforms saw a growth of approximately 6% year-over-year in the first quarter with positive contribution by variety of the segments.

As you can see, the IP division grew 9%. Actually our Edge routers grew 12% and we saw a little bit year-on-year reduction in the backhaul. We had extremely strong first quarter in backhaul last year and the net result is the overall 9%.

[Profits] revenue was down 15% year-on-year and that's primarily driven by reductions in legacy cross connect products which were down approximately 50% year-on-year. Our WDM revenue was about flat, and as I said before the [18.30] is increasing to 36% of the hardware sales in optics.

Wireless is approximately 6% year-on-year growth with strong growth in LTE. If you look at our fixed networks, it is about a 10% growth both, copper and fiber were 25%, our legacy product lines fixed networks are down about 47%, and we are seeing good growth in platforms from our motor products, from SDM and continue in charging rounding out the majority.

You can see our focused businesses are down approximately 23% that is primarily driven by submarine or underwater cable business, which is at the low point of its cyclical trend. It is down approximately 45% year-on-year. Our enterprise business is slightly down, primarily driven by voice with growth in data.

So I think that you are seeing in our core products good growth and as we turn to new profitability by segment, you can see some of that reflected in the year-on-year improvement. In networks, you can see a €45 million improvement in overall operating profit in the Network segment. That is driven by a variety of businesses, IP, fixed networks, platforms the slight deterioration in wireless, because of the shift from legacy technologies that 130 talked about year ago.

Our focused businesses are down year-no-year 23%. As I said, that is really driven by submarine. Now, in our submarine business, we are seeing good potential bids coming out for new underwater cable. We have won a number of new contracts and we expect those contracts to start to begin to be put into place for actual production in laying of some of this some of this new cable as we move through the course of this year. As I said before, our managed service business has seen a remarkable turnaround in profitability year-on-year period and that's primarily by the actions we have taken since the summer to address a number of contracts in the overall company.

If I turn now to revenue by geography, you can see the North America is extremely strong at 16%. If you look at our top customers, Verizon, Sprint and AT&T are all over 10% of our revenue. If I turn to it APAC, you can see that it is down approximately 4% year-over-year. That's down 4% year-over-year. If you look at that, China is essentially flat to slightly up.

We are seeing reduction in India, primarily because of the actions we have taken on managed services. But we have very strong growth in Japan where we have almost a doubling year-on-year of our revenue.

In Western Europe, you see that we are down approximately 10%. Western Europe is about 8% of that, Eastern Europe is 26% and the rest of the world, we are down slightly in the Middle East and in South and Latin America we are down 17% where have a mix between countries, Mexico, which was extremely strong, build out in a number of areas in 2012. It was down about that 53% but was offset by Brazil which is increasing by 17%. So good overall geographic mix.

If I turn to the balance sheet. There is really no change in the balance sheet except for FX. The only thing I would point your attention to, is the difference between the liabilities for pensions and our shareholder equity. As you will see later, our funded status or underfunded status of our pensions has improved dramatically. The result of that has been that we have seen approximately €500 million reduction in our liabilities for pensions. That has a corresponding effect on our shareholder equity where you the shareholder equity improved by that €500 million but offset by the net loss of €353 million. Those are the two major items on the balance sheet. Other than that, there is no change. Impairments, there are no impairments and no impairment of goodwill.

If I turn to operating working capital. You can see that at actual rate operating working capital increased about €65 million quarter-on-quarter. When we adjust for currency, that increases slightly to €70 million

If I look at the various components, inventory is flat quarter-on-quarter. When you adjust for currency, there is no growth in inventory from quarter-to-quarter. So we are managing our inventories quite well. Our receivables are down €314 million, quarter-on-quarter. I will note that our discounting programs in the first quarter of 2013 are approximately €936 million, which is down about €160 million from the fourth quarter of last year.

Finally, on our payables. You can see our payables have gone down by €385 million, trade payables by €184 million and then construction contracts in progress payments are the remainder. Overall our cash conversion cycle is 59 days, unchanged quarter-on-quarter and improvement of one day year-on-year.

If I turn to free cash flow. Obviously, free cash flow is not what we had expected. It is minus €533 million. As you look at the drivers of that, part of that is the adjusted OP loss of minus €179 million. You see the cash impact of operating working capital of minus €72 million. That minus €72 million is primarily driven by the reduction in payables, which consumes cash of €409 million offset by receivables growth.

When you compare that to the year ago period, you can see that in the year ago period we had €255 million of positive operating working capital. In that €255 million we consumed about €155 million for inventory growth. We got about €374 million benefit from receivables growth and our payables were actually €36 million benefit. That gave the €255 million

So quarter-on-quarter, you can see that we have made an improvement in inventory and we have seen significant change in payables. As you peel back that payables, you see that trade payables are slightly up from where they were a year ago, but these advance payments and advance deposits which were primarily the big change. That comes from two things.

First, from the deferral of projects which have prepayments associated with them. This is a very big item in our submarine business where once a contract is signed and before you begin to do the work, there is a prepayment of a portion of the contract. Since submarine is down to a cyclical point, we are waiting for those prepayments as the new contracts are being signed and as the working is beginning. This is a timing effect. We expect that be recovered through the course of this year.

Second, we had some changes in some timing with regard to customers' contracts on a couple of items that again is to be made up through the course of this year. So, as it relates to the payables, it's more of a timing effect and not a structural change. If I go down to the rest of the items in the free cash flow statement, from a non-operating standpoint you can interest rate charges at €101 million. It is up from €85 million. Clearly that's the cost of the additional financing we have done.

You see we have a minus €28 million in taxes from the year ago period. That's a big swing. In the first quarter, we had a major gain in taxes associated with Genesys. Our pensions were about the same, restructuring charges were up about €18 million to €100 million and our CapEx is slightly down. As we end the quarter, we ended with €6.2 billion of cash and marketable securities. As part of our secured loan, and we retired our revolving credit facility in January.

If I now turn to pensions, I think the pensions truly good story. Our underfunded status has improved by €890 million. When you look at that excluding currency, you see that we had a positive impact of about €260 million from increase value of our assets portfolio and we had about €606 million reduction in our obligations. The vast majority of that is due to the discount rate moving upward by 25 basis points. As you know, the discount rate increases the liabilities drop.

We had about €55 million improvement for planned amendment we made and those two items are offset by interest cost. I want to remind you that from a U.S. pension standpoint, ERISA funding methodologies in employed. As we look at our pensions, using the ERISA methodology, all of our U.S. pensions are overfunded and we expect no pension contribution on U.S. pensions through at least 2016 event.

So, with that, operator, I would like to now open the phone for Q&A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Thank you. Our first question comes from Alexander Peterc from Exane BNP Paribas. Please go ahead with your question.

Alexander Peterc - Exane BNP Paribas

Yes. Hi. Thanks for taking the question. I would just like to clarify two points. The first point is that what's the usual seasonality with the book-to-bill and usually you do mention that at the beginning of the year and since my memory looks like 105 to 1.1, so is the current book-to-bill up a little bit on the lower side given the seasonality issue this year?

The second one is, could you elaborate a little bit on our market position with respect to TD-LTE deployments in China. How much market share looks like? And how does market is expected.

Michel Combes

Okay. Let me take your last question first, which is TD-LTE. We are I think extremely well-positioned to do well on TD-LTE growth in China in this past year. As you know, we are very large participant in the China mobile trials, and therefore we expect that we will be able to see good growth in China in the second half year, especially on TD-LTE.

As it relates to the overall book-to-bill, we are at the about 103 this quarter. It is, I think from a seasonal standpoint, slightly down from where we were quarter a quarter ago at this time, a year ago at this time. But, if you look at our backlog at €8.9 billion, I am pretty comfortable going forward.

Operator

Thank you. Our next question is from Kai Korschelt from Deutsche Bank. Please go ahead with your question.

Kai Korschelt - Deutsche Bank

Yes. Yes. Thanks for taking my question. The first one was, I know you don't have any specific targets or guidance for this year, but it looks like things are somewhat it's like the you had spent China second half should hopefully be that wireline in Europe. So I was just wondering, is there any floor in terms of operating profit or cash burn that you have, if any.

The second question was, just for Michel. I know its early days and I am not sure if you can answer the question but I am just wondering, from the first couple of months, what's your impression of the company, (inaudible) position ultimately size and shape or scope of the company and how your thoughts currently.

One third question, if I may. I just want to ask you that it looks like that it is still running higher than peers. I think you are running at 12 months rolling, 15% of revenues, so you have got excess of about 11% and I think it is around 10%, as I am told. So there still seems to be quite a lot of room. So I am just wondering if that may be some of the additional cost savings you are alluding to our potentially in that area? Thank you.

Michel Combes

So just on your second question. Michel Combes speaking. As I have clearly stated, I will share with you my view and obviously my, let's say, decisions early summer. So I stick to that. For the time being, I am focused on (inaudible) and I am focused on making sure that the company is good work and deliver what has to be delivered from a growth perspective and also from a performance program perspective. So I just give you, rendezvous, as we say in French, early summer in order to share with you as next stage.

Paul Tufano

So with regard to your question, we said when we presented our fourth quarter results that we thought that 2013 would be slightly better than 2012. We still believe that. With regard to, will we continue to focus on SG&A reductions going forward? The answer is definitely.

Operator

Thanks, John. Next question comes from Francois Meunier from Morgan Stanley. Please go ahead with your question.

Francois Meunier - Morgan Stanley

Yes, it is actually Francois Meunier from Morgan Stanley. Yes, maybe a question about SG&A and the decline in the quarter which is around €8 million sequentially. We have lots of employees leaving the company. I am really puzzled why SG&A is not going down more than the current rate. That’s really my first question.

Paul Tufano

So when you look at the fourth quarter to the first quarter, you have a significant impact because of accruals. As you know you have to accrue the liabilities of vacation accruals as people earn it. So in the first quarter, you increase your accruals on vacation. In the fourth quarter, we have a policy, if you have not used your vacation by the fourth quarter, it is reduced. So you see a big credit in the fourth quarter for any unused vacation.

So a good deal of the increase in SG&A that you see is a result of vacation accrual. Quarter on quarter, our vacation accruals increased by €30 million because in the fourth quarter, we zero them out and in the first quarter we accrue them. So when you adjust for that you get a significant reduction in SG&A.

Francois Meunier - Morgan Stanley

So, if I hear you well, I should consider that in basis, SG&A has decreased by €40 million of profit.

Paul Tufano

I think if you look at SG&A reduction quarter-on-quarter, fixed to constant currency, it is less than €40 million but it is somewhere probably the range of €20 million plus.

Francois Meunier - Morgan Stanley

Okay, thank you. Now another question for, Paul, if I may. When do you think you will make a tender for the debt outstanding given the money that you raised recently? It doesn’t look to me like very good cash management.

Paul Tufano

Well, look, we are very aware of the negative cost of carry. We let you know when we are going to announce something when we are ready to do it.

Operator

Next question comes Gareth Jenkins from UBS. Please go ahead with your question.

Gareth Jenkins - UBS

First, I just wanted what level of IP licensing you saw in the quarter and how that is shaping up for the year in terms of your activations of growth in that business and monetizing IP.

Secondly on the North America, just wondered, you obviously have seen strong growth rate so far, where your expectations greater is in the North American market and what CDMA is likely to do through the course of this year?

Michel Combes

So, if you look at licensing revenue, we had [put out] your license revenue in the first quarter was rather neater. It was a new less than €15 million. Now, as we said before, we changed our focus. We are on reexamining how we are going to get to address driving increasing license revenues and we would expect that we would see a material change in that number as we move into the next three quarters.

And relates to CDMA, obviously, our CDMA numbers are down year-on-year from an overall profit contribution percentage and different customers had to use CDMA to balance out their networks. I think the overall trend in CDMA will be down. You might see some temporal changes as customers have to fill out capacity in order to meet requirements.

Gareth Jenkins - UBS

Just as a follow-up for the [talking] widely about the North American market in terms of the terms of the split of business unit. Should we expect LTE to move towards expansion from coverage? What's wireline doing? Are you seeing good pick up in wireline? What are the comment about the…

Paul Tufano

So, if you look at North America, and we see expansion in certain accounts, and as you know, we have a green field with one, where we are heavily participating. So, I think North America, we see good demand and it will continue as we move through the course of this year. On wireline, we are experiencing very good demand in wireline. if I look at our wireline business, it is up in the U.S. pretty well. The copper business is up almost 52% year-on-year.

Operator

Thank you. Our next question comes from Vincent Maulay with Oddo Securities. Please go ahead with your question.

Vincent Maulay - Oddo Securities

Hi. The first question is if you could have a new [short] background of the customer expense on Alcatel-Lucent. Should [already] any need to increase gross cash position to (Inaudible)? There is second question on, how do you see as the TD-LTE contracting extra on growth that it could impact materially the gross margin?

Paul Tufano

So, I think if you look at our cash position with the €6.2 billion of cash on our books, I think our customers are pretty well comfortable with our overall liquidity, so that's the concern at all. With regard to the TD-LTE bids that will take place in the second half of the year, they will be competitive. We've already factored that into our plan.

Operator

Thank you. Our next question comes from Simon Schafer from Goldman Sachs. Please go ahead with your question.

Simon Schafer - Goldman Sachs

Yes. Thanks so much. A couple of questions for me, one, just could you clarify on the core router business. Great to see you got eight customers now, but I saw Juniper, I think was talking about also some shared contracts also Globacom I was under the impression it was one of your initials. Maybe you could just talk to us about eight customer is great, but how is the visibility on revenue recognition coming along that would be helpful.

Paul Tufano

So, if you look at our router business, I think that we just launched that only early in February, so yes there are eight customers today. The two new ones were Globacom built the University of Pittsburgh Medical Center. We are ramping that product judiciously. There are variety of trials that are in place right now. I think as we look at the backlog, we believe that we will be able to grow it quite handsomely, but we are entering the new market, we are doing that judiciously with quality in mind but I think if you look at the attributes of our product, I do not think anyone has a product that has four times the speed and about 50% of the floor space in total cost of ownership. So we were pretty excited about that product.

Simon Schafer - Goldman Sachs

Got it, thanks a lot. My second question was just on the cash flow. Thanks for the elaboration on just why the prepayments are down so much. I think I heard you say you expect that to recover throughout the year but what sort of timing is reasonable to recuperate some of that working capital also? Is that immediate or do we have to wait until the end of the calendar year? Just some color would be helpful. Thanks.

Paul Tufano

Well, I think that a part of it, we will see it improve over every quarter over the course of next three quarters. The part that will be associated with activities like our submarine and wining contracts will be little bit more lumpier. I think it is probably more in the second half of the year.

Operator

Next question comes come from Sandeep Deshpande from JPMorgan. Please go ahead with your question.

Sandeep Deshpande - JPMorgan

Could you possibly comment on the optics business. You have seen continuing declines in the optics business and this is in your restructuring plan, a key part which is going to be profitable for 2015. How do you see that profitable? How do you see this business coming back to profitability in terms of the mix and how much there is in terms of legacy which still has to roll off?

Paul Tufano

Okay, well, it’s a significant question. So, if you look at our optics business, and let's just talk about the revenue generation of optics. We are seeing our WDM business continue to grow. As I said before, the 1830 platform is now about 36% of the overall total hardware in optics. Our legacy businesses are down to a point now where they are about €15 million worth of revenue any quarter. So I think that as a road their impact is going to be relatively minor. They are going to asymptote. So as we continue to grow our 1830, I think you will see us begin to grow quarter-on-quarter and year-on-year, every quarter.

Now the 1830 is the key to drive that. As I said before the 1830 overall growth has been almost double from a year ago at this time. But more importantly the amount that were shipping on the 100 Gigabit line card, which is are leading-edge line card, is going up from 11% or 7% in the first quarter '12 to about 19% today.

As a result of that, we are seeing overall WDM margins improving. So I think that as we see the mix of the legacy asymptoting, and we start seeing the WDM growth increasing, you will start to see some positive margin improvement or contribution from optics. That will continue over the course of this year into next year.

Sandeep Deshpande - JPMorgan

Thanks. Following on in to wireless. Last year, wireless turned down in terms of the margin. And that was the negative on your network business. Does the TD-LTE ramp up in the second half of the year help that scale overall in wireless and will it help the profitability overall? Or is it that some undergrowth margin there is going to be lower than the existing wireless business you have which will hurt the overall margin structure in wireless?

Paul Tufano

So if you look at the TD-LTE products, obviously depending on the market you are in, you will see different types of price points. I think that the as we grow TD-LTE, the volume impact will have a cost benefit to the entire product line. There would definitely be margin differences between geographies but as I have said before, we have taken that into account in our planning.

Operator

Next question comes from Achal Sultania from Credit Suisse. Please go ahead with your question.

Achal Sultania - Credit Suisse

Thank you. So if I were to look at your operating income, it seems that all the year-on-year improvement in margins is coming from managed services and the aggregate level of losses in the rest of your business has actually increased despite a slight increase in sale. Now can you help us understand, apart from the mix shift towards IP, which are the other business areas that you are most confident that would drive that margin recovery on year-on-year basis and then I have a follow-up.

Michel Combes

Sure. So, if you look at the overall margin contribution of managed services, you are right. It's a big year-on-year improvement €55 million plus. Now, assuming that's offset by the fact that last year we had a very high CDMA content in ourselves, and so to some degree the CDMA erosion the managed services offset each other. Then the other improvement comes from the other businesses in tandem. So, as we move through the course of this year, the impact of the legacy technologies will diminish, the managed services improvements will continue and you will see the improvements in the mix of the products we talk about driving margins upper.

Achal Sultania - Credit Suisse

Which is the one that you are confident within that?

Michel Combes

So, look, I think that we believe that our IP products will continue to do well. We believe that we will have the opportunity with, as I said before 18.30 growth then 100-gigabit growth that will have the positive mix shift. And, you know, there are platforms' growth as well. So, I think we have got a number of a product lines that can do well. Clearly, it's about us delivering quality to our customers and gain the share and that's what we are going to go do.

Achal Sultania - Credit Suisse

And then maybe a follow-up on, it seems that you could be looking for additional cost savings going forward, so how should we think about the level cash restructuring both for the year, [€500] million is a sensible number? And what kind of declines should we expect for next year in terms of cash restructuring.

Michel Combes

I think €500 million. I know, we said that around €500 million. We are sticking there. As we said before, cash restructuring will be over two-year period because of the plans in Europe. As we get better visibility with regard to how people are using those plans, we'll what the impact for next year.

Operator

Thank you. Our next question comes from Simon Leopold of Raymond James. Please go ahead with your question.

Simon Leopold - Raymond James

Thank you very much. I wanted to see if you could talk a little bit about how you are thinking about the linearity of service provider spending this year, particularly speaking about the strength you are showing in North America in the first quarter against the backdrop of particularly AT&T light spending in the first quarter.

I am just wondering if we can extrapolate a backend loaded CapEx here to the degree in which you expect your business to be backend loaded in 2013.

Michel Combes

So, look, I think that we would expect normal seasonality. We are pleased by the progress in the first quarter. We'll have to wait and see how that materializes for the rest of the year.

Simon Leopold - Raymond James

And, just a quick follow-up if I may. The CDMA business, sounds like it was pretty good this quarter and it's favorable to gross margin. Do you have the ability to call out how much that helped in this quarter?

Michel Combes

So, look, I think as I said CDMA revenue probably was not as affected quarter-on-quarter, but the mix was pretty dramatic.

Simon Leopold - Raymond James

Great. Thank you very much.

Operator

Thank you. Our next question comes from Didier Scemama from Merrill Lynch. Please go ahead with your question.

Didier Scemama - Merrill Lynch

Good afternoon, gentlemen. Thanks for letting me on and very much and, I will change in the past and good afternoon to Michel.

My question was on the restructuring cost savings and going back to your point to pull really should we assume that you are going to take on more managed services contracts this year. In essence, what I am what I am trying to get to is, what sort of net SG&A reduction we should look for by the end of this year or maybe by the end of next year if that's and is your target to give us and I have got a quick follow-up. Thanks.

Michel Combes

So, we look at the managed service contracts. We had 15 contracts that we were going to address. We've addressed kind of. Now, we have added some managed service contracts this quarter, but there is different nature of contract. They are not doing operating and paying contracts, we are doing more professional services contracts as it relates to a network transformation and network management.

So, you will see us take on additional managed service contracts, but they will be of a different composition and you there will have to be different criteria that we haven't had in the past. As I said before, with regard to SG&A, we will continue to reduce SG&A. It has been a focus of us and we have taken the bulk of our reduction in the fixed cost and expense piece of the €1.25 billion predominantly from SG&A and we will continue to do that.

Didier Scemama - Merrill Lynch

Right, but on a net basis, it is going to continue to track down over the coming quarters. Is that the right way to think about it?

Paul Tufano

That’s the way you should think about it.

Didier Scemama - Merrill Lynch

Good, and then, a quick follow-up, if I may. On the routing front or IP fronts, Ericsson historically has not been a major player in that market, but they start to talk more convincingly about design wins or contracts in edge routing. Historically, as I said, they were now a major player. How do you see the competitive landscape evolving and is there any reason to be concerned about your margins in IP? Thank you.

Paul Tufano

So I think that we have some pretty competitive products in IP portfolio. Obviously, we do not take competition for granted. So it is key for us to be ahead of the technology curve and to continue to deliver service levels to our customers that they like them. If we do those things, then we will fare well against the competition.

Operator

Next question comes from Sebastien Sztabowicz from Keppler. Please go ahead with your question.

Sebastien Sztabowicz - Landsbanki Keppler

Could you please provide some color on your small cells strategy and also on the progress you made on (inaudible) lightRadio solution at your clients?

Paul Tufano

So as we have said in the past, small cells continue to be a key part of our strategy in wireless. We believe that we have a leadership position small cells. We have had a number small cell wins, quite frankly around the globe and specific accounts. We are going to continue to press that technology and we believe that we will grow, as a percentage of our revenue around the world.

Sebastien Sztabowicz - Landsbanki Keppler

Do you have any figure to share with us on the level of revenue you can generate in small cells over full year 2013 or maybe if its too early in 2014?

Paul Tufano

So it is relatively early in the life of that product to talk about any meaningful revenue. But I will tell you that we are talking and in discussions with a number of customers about how to use that solution to handle density issues in specific areas. We are working with some major customers to do that. As we said before, Sprint is a major customer of our small cells as they look at how to use that in their (inaudible) network.

Operator

Next question comes from Eric Beaudet from Natixis. Please go ahead with your question.

Eric Beaudet - Natixis Securities

My question concerns managed services. You have already renegotiated 10 of the 16 contracts that were loss making but you had said in the past that by doing so you would some and probably lose around €400 million of sales, if I remember correctly. Right now, your managed services sales are just down 4%. So does that mean you were able to renegotiate more of the contracts than you had hoped and lost less than you had thought? How do you see that going forward? Thanks.

Paul Tufano

So some of those contracts, obviously, we have exited a number. There are a few others where we are in the process of renegotiating the terminating activity. So there will be some contracts where we will, over the course of this year, conclude our relationship or turn it over to somebody else. That will impact the overall revenue. We still expect that we will see revenue decline of about €400 million over the period.

Operator

Next question comes from Dean Gold [ph] from Brigade Capital. Please go ahead with your question.

Unidentified Analyst

Just first on for (inaudible). Given that you are coming up with a new strategy plan this summer. Does this mean that your compensation package will be rebased to that new plan or it will continue to be based on the prior COs plan or I guess they are related to this plan or is this plan related to the loan issuance?

Michel Combes

Well, so as you said, it has been published and will be presented at the AGM on the May 7, I guess and my plan is let's say quite transparent, and so it was a target of those onto 2013 performance planned delivery for 2013, and then for the years to come it will be up to the board to decide what will be the target. So, all that is fully disclosed and I intend to have nice compensation plan really reflecting the value creation of the…

Unidentified Analyst

Okay. Then I did read through it. I just want to make sure that if your strategic plan came up with something different or you found the objectives to be unreasonable and you wanted to perhaps take the company on a different route that your competition would reflect that or the success of that.

Paul Tufano

So, that's all. Just answer to your question, so 2013 clear performance plan and 2014 answer with days on the target, which would be flexible then it should be with a consistent level let's what we [will].

Unidentified Analyst

Perfect. This is a two-part question. First, are you planning to buy Siemens NSN entity?

Paul Tufano

Could you repeat that question, please?

Unidentified Analyst

Are you planning to buy Siemens with NSN entity?

Paul Tufano

I guess, we never comment any M&A whatsoever, so don't you think to expect from us any comment on this type of question.

Unidentified Analyst

The reason I asked was that, in January, we lend a lot of money to you in good faith, so on the basis that you'd be refinancing. That's there and there's of course we haven't heard anything. I think there's concern that maybe I wake up one morning to find out that you have not borrowed money for me to return it but, then something like purchase and assets account give you any cash like NSN, so I guess would you for reassurance that you actually will refinance that with the cash balance in when you can reconfirm that you will do that.

Paul Tufano

Yes. Let me answer that question. We said that we are going to use the proceeds. It's still low to resize that. That is our intent.

Unidentified Analyst

Okay. The last question is just on the U.S. I was surprised margins weren't better given U.S. growth. I know you explained sort of why they are down year-over-year, but still I thought maybe that would be higher given the significant percentage of revenues with U.S. is. How is that your outlook is the same given peaking CapEx cycles in the U.S. as commented and as we saw AT&T reduce their guidance?

Paul Tufano

As I said before, we said that 2013, we started out in 2012, but that's unchanged.

Unidentified Analyst

Right. I guess I was surprised that it will be unchanged following that commentary following just on quarter. Okay. Thank you.

Paul Tufano

Operator, the next question please, and I believe this will be the last.

Operator

Okay. Thank you. Our last question comes from Richard Kramer of Arete Research. Please go ahead.

Richard Kramer - Arete Research

Thanks very much. Michel, with respect to the capital structure and some of the questions on this and the debt that has been raised, can you rule out at least for the medium term any need to raise additional equity and it's not really so much about changing the debt structure, but just that the shareholders can be reassured there won't be rights issue in any points to raise additional equity.

Paul, given your comments in the press about non-core disposables, can you just mention whether the focused businesses are currently generating or consuming cash flow and then I have one other question about the IAS19, which I'll follow-up with after that.

Michel Combes

So, on your first question, I think that I have already been quite clear since the beginning of the discussion. I don't intend to make any comment today. I will confirm with my assessment early summer.

Paul Tufano

So, with regard to focused businesses, as you can see their margins are, the operating margins are negative slightly driven by submarine. So, you know from an EBITDA standpoint it's a little bit different, but there are there is a low point to their cycle. We expect time to improve as we move through the course of this year. That the net of the focused businesses.

Richard Kramer - Arete Research

Okay. Then just to follow-up on the IAS19 adjustment, it's quite a larger number last year in terms of readjustment that you would have reported €637 million larger loss and it looks to me like it makes your EPS and therefore any future be far more sensitive to how adjustments in the discount rate flow through every quarter. Is that a fair reading of it and how do you anticipate giving investors an idea on that and how you would manage that?

Paul Tufano

So if you look at the net income number, there is about €190 million swing as a result of that accounting change. I think last year, we had about €600 hundred million benefit from the previous accounting treatment. Remember, this is a non-cash change. So its just a reflection of what the future gains will be. So from a reported standpoint, it affects the overall business but it is not a cash cost and that’s why, quite honestly, we talk more about the adjusted operating profit.

Richard Kramer - Arete Research

Okay, it just seems that it would be extremely quite confusing in terms of modeling of an EPS and therefore future PE discussions. Just maybe on last follow-up about the focused businesses and your comments in the press about non-core disposals. Would the items that you consider non-core as you finish the review, or Michel publishes his review in mid-summer or early summer, would those businesses join the other two for some reason in enterprise in the focused businesses category much like, I think you saw (inaudible) with businesses they then subsequently disposed off.

Paul Tufano

Well, look, I think let's wait to see when we get done and we will report back later on when Michel speaks to you in early summer.

Richard Kramer - Arete Research

Okay, thanks.

Paul Tufano

All right. Thank you, ladies and gentlemen for participating today. It has been a pleasure. Thank you.

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