Alcatel Lucent's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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Alcatel Lucent SA (ADR) (ALU)

Q3 2013 Earnings Call

October 31, 2013, 8:00 am ET


Michel Combes - Chief Executive Officer

Jean Raby - Member of the Executive Committee, Chief Financial Officer and Legal Officer


Kai Korschelt - Deutsche Bank

Francois Meunier - Morgan Stanley

Gareth Jenkins - UBS

Sebastien Sztabowicz - Kepler Cheuvreux

Simon Leopold - Raymond James

Didier Scemama - Bank of America Merrill Lynch

Eric Beaudet - Natixis

Achal Sultania - Credit Suisse


Ladies and gentlemen, thank you for standing by. Welcome to the Alcatel Lucent press and analyst conference. I will leave the floor to Michel Combes. Please go ahead, sir.

Michel Combes

Good afternoon and good morning to all of you. I am pleased to present to you our Q3 '13 earnings with Jean Raby. Let me give you the key points of the third quarter.

Our topline growth is accelerating, growing at plus 7% year-over-year at constant foreign exchange rates, compared to plus 4% in the second quarter and plus 2% in the first quarter. This is driven by the positive trends we observed in our industry since the beginning of the year and our geographical and product repositioning.

Gross margin progressed by five points, thanks to our topline growth and improvements in IP routing, terrestrial optics and ultra-broadband access. That gross margin improvement in addition to fixed cost savings contributed to a strong progress of the adjusted operating income in the third quarter.

Our free cash flow improved by €150 million compared to last year, thanks to higher profitability but we still have to improve here and this remains my absolute priority. Since June, we have made substantial progress in The Shift Plan implementation and particularly in Q3 '13. We had good traction in our LTE overlay strategy with key wins with Sprint, with Telefónica and in China. We see the benefit on the gross margin from higher revenues made by our 1830 WDM platform and 100 gig line cards in terrestrial optics. We also refocused our innovation capabilities by selling some non-core assets from our IP platform business group and putting in place a strategy partnership with Qualcomm.

Looking to the fixed cost savings. At the end of September, we are close to €260 million savings, and we announced 10,000 headcount reductions for '14, '15.

Finally, we have further reprofiled our debt in August, reducing the bonds maturity to less than €900 million to 20160. I am also pleased to tell you that we have reduced the level of cash restricted by exchange rates controls in China by $200 million.

Looking ahead, we will continue to focus on the execution of The Shift Plan. We expect a strong seasonal activity in Q4 and to exceed our €300 million fixed cost savings target for full year 2013.

Next slide. This is the first time that we are presenting to you the new reporting structure, including the segment operating cash flow as I was committed to you after the announcement of The Shift Plan.

We will come back into more details on those figures, but I would like to highlight some of them. At the top line level both, Core Networking and Access segments showed high single-digit growth year-over-year at constant rates.

Core Networking segment was the driven by strong trends in IP routing and hardware recovery in Optics and Access segments benefitted from wireless and fixed ultra broadband access deployments.

Looking at adjusted operating margin level both, Core and Access segments are improving and profitable. Core Networking increased almost 600 basis points year-over-year, reflecting strong contribution from IP and improvements in the terrestrial optics.

Access was back to profitability after several quarters of losses with a strong contribution from fixed networks. The segment operating cash flow is positive €51 million group level and improving by close to €170 million from the year ago. Both, Core Networking and Access segments are contributing to the cash flow. You can see that it cash flow was impacted by a negative change in operating working capital due to inventory builds related to prepare network routes out for the next quarter.

Let me give you some additional color by segment, starting with Core Networking. IP routing had a strong performance growing 15% year-over-year at constant rate, especially with the second consecutive quarter of growth in EMEA, plus 50% year-on-year in Q3 2013 versus plus 6% in Q2 2013.

Our core router recorded four additional wins in the quarter. We now have a total of 14 customers since its launch one year ago and start generating revenues. In Evolved Packet Core, we have good customer momentum and we have been ranked market leader by (Inaudible) in the second quarter 2013.

Moving to IP Transport, which is gathering terrestrial and submarine optics. Trends in terrestrial optics revenues continued to prove with flat revenue this quarter after a decrease of around 10% in the first half of the year.

WDM revenue growth accelerated to 10% year-over-year at constant rate driven by Americas and Asia-Pacific. The 1830 platform is now representing 38% of terrestrial current sales compared to 34% in the first half and 24% in Q3 2012. Together with a increase of 100 gig line card shipments, we had significant positive impact in our terrestrial optics gross margin.

Our submarine business grew plus 4% year-over-year at constant rate confirming that low point of the activity is behind us. In the course of the quarter, we also signed three new contracts. Finally, in IP platforms, this quarter recorded a low single-digit growth at constant rate after a plus 25% growth in the previous quarter, so the volatility is due to projects rollouts milestones.

Taking a higher level view there is a solid momentum in this activity driven by IMS voice over LTE and customer experience, which is highlight by a revenue increase of plus 13% over the first nine months of the year.

Core Networking segment is, as you know managed for growth and all business lines are indeed growing, consistent with The Shift Plan. The goal is to leverage this growth with efficiency gains. This is highlighted by a decrease of the SG&A to sales ratio in the core segments. It is now at 15.6% for the first nine months of 2013, compared to 17.3% in the same period of 2012.

Moving to access segment and first to wireless. LTE more than doubled, compared to the year ago quarter. It confirms to be the largest share of wireless revenues offsetting the decline in legacy technologies. Our LTE overlay strategy is gaining momentum as highlighted by the recent public wins by Telefónica Spain and key wins with existing customers in China and in the U.S. with Sprint. This has been achieved by leveraging our LTE overlay platform across different networks.

Talking about fixed access. Across the globe, operators are refreshing and upgrading their fixed access networks to ultra-broadband. Our copper and fiber solutions grew more than 10% year-over-year this quarter and we had good commercial successes with four new veteran customers for a total of 17, 14 new FTTH customers and two cable customers in the U.S. with EPON. Fixed access profitability has significantly improved turning into a strong contribution to cash.

Let's now look at managed services. We have completed the restructuring of this business by successfully addressing all of the 15 identified contracts. This has a negative impact on the topline but has improved our profitability.

In licensing, we generated €28 million of revenue and actions we are taking shall further improve our performance in the coming quarters. The Shift Plan announcement I committee to provide access figures on the decrease of operating expenses. For the first nine months of the year, they have decreased by 3% at constant rate and the cash contribution of the segment is €26 million in the third quarter.

Well, so let's say the next slide, try to comment where we are in the implementation of The Shift Plan. Fixed cost savings, first, are now totaling €259 million for the first nine months of 2013, with €84 million savings achieved in the third quarter. Our headcount base has been reduced by 5,000 excluding the impact of managed services contract extension and by 8,600 in total since January 1. Since the beginning of the year, SG&A are decreasing by 10% and the SG&A to sales ratio is at 14.8% at group level for the first nine months of the year compared to 16 17% in the same period of 2012. We are making good progress to close gap with our peers and we will continue to focus on this.

We also maintain, of course, our pave of innovation. This quarter, we reinforced our presence in the cloud with the opening of our new lab facility in Israel and new Nuage is getting solid traction among larger enterprises, could out and services providers with dozens of trials.

In small cells, Verizon started deploying our product and we have been selected by Telefónica in Germany. Our common team with Qualcomm is up and running and we are on track for the multi-standard indoor program that we have announced. Finally, in fixed networks, we expanded our portfolio and announced a 10-gig EPON solution targeting cable operators, particularly in North America and announced a macro node solution to bring fiber deeper in the network.

On the balance sheet, last summer we issued 500 million U.S. dollars senior notes bringing the total to debt issued at €1 billion since the launch of The Shift Plan. As a result, we have less than $450 million in bond debt maturities until end of 2015, and less than the €450 million in 2016. We will remain of opportunities going forward.

In the third quarter, we also decreased as I have already mentioned the cash held in countries subject to exchange control restrictions by 200 million U.S. dollars.

The next slide is the usual slide that I am using in order to help you to monitor our implementation of the cost savings after The Shift Plan. Here is a bridge between the fixed cost change and the P&L, as we can see it.

Fixed cost savings roughly split half in fixed operation costs and half in operational expenses, so based on that what is our priority going forward? I would say no change. We will continue to focus on the straight and rapid execution of The Shift Plan.

This means reignite innovation in the company to better serve our customers, reposition Alcatel-Lucent as an IP and ultra-broadband access specialist, be ruthless on cost reduction and manage our business by cash.

On that, I would like to turn to Jean Raby to comment a little bit more in details the figures and then we will open to Q&A. Jean, please?

Jean Raby

Thank you, Michel. Good morning. Good afternoon, everybody. I am now commenting on slide 12, where you see the reported results for the third quarter under IFRS accounting. It shows an operating income of €95 million and net loss of €200 million.

The two main elements are restructuring charges for the quarter of the hundred and €117 million close to double the amount incurred in the quarter of 2012, mainly reflecting social charges associated with the actions we are taking to reduce our expenses,

Second driver is a financial loss of €218 million out of which there is €90 million of interest charges and €112 million of net loss incurred on the repurchasing of our debt during the second and third quarter of this year. Going forward, I will not comment on the adjusted P&L that exclude the negative impact entries from purchase price allocation accounting associated with the Lucent acquisition.

Moving onto Slide 13, our starting from the bottom, the adjusted operating income as was mentioned is €116 million, a strong progression of negative €126 million over year ago. This represents a margin of 3.2% on revenues.

Year-to-date, for the first nine months of the year, we show an improvement in operating income of €360 million, compared -


Resulting from higher volumes, more favorable mix across business lines, IP routing, IP transports and the access segment and lower fixed operation cost. Sequentially the 70 basis points increase in gross margin mainly resulted from improvements in our fixed operation costs. Operating expenses were down 4.2% in the third quarter compared to the year ago, or 2.9% at constant exchange rate, mainly driven by SG&A decreases of 5.0% of 6.3% at constant exchange rate.

Looking at the first nine months of the year and adjusted for FX variations, SG&A decreased by 10.2%. As we Michel mentioned, one of our key goal is to reduce SG&A and our SG&A to sales ratio has decreased sequentially throughout the year from 16.6% in Q1 '13 to 14.0% in Q3 '13. The increase in absolute terms at actual rates of SG&A from Q2 '13 to Q3 '13 reflects mainly field trials. At constant currency, we had a change of negative 0.6%.

Moving to slide 14. I will comment on revenue changes by regions. North America posted a second consecutive quarter of sales growing at nearly 20% year-on-year with good momentum in IP, LTE and fixed networks. Verizon, AT&T and Sprint are each 10% plus customers. APAC declined 4% from a high comparison basis with China flat and Japan growing driven by IP. Europe was up 4%, with Western Europe gradually recovering, the region was slightly declining in the second quarter but is now growing at 7%. Eastern Europe is down but reducing its pace of decline. In the rest of the world, Middle East and Africa continue that recovery witnessing growth in the mid-teens while Central and Latin America witnessed a slowdown with a high comparison basis in Brazil and a complex situation in Mexico.

Moving onto slide 15, which provides the breakdown of revenue by operating segment under our new structure. IP routing, strong performance is continuing, growing at 14% year-on-year at constant exchange rates, driven notably by APAC and a second quarter of growth in EMEA. Sequentially, it is down, but this is from a strong quarter in Q2. I will reminded you that Q3 '13 is one of our largest ever quarterly revenues in IP routing.

IP transport formed by terrestrial optics and submarine grew 1.8% at constant exchange rate. As mentioned by Michel, terrestrial optics was stable in the quarter, driven by WDM whose growth accelerated from 7% year-on-year in Q2 '13 to 10% year-on-year at constant rate. Submarine grew 4% year-on-year at constant rate during the same period.

IP platform grew 1.2% year-on-year at constant rate. To give you some color, SDM revenues almost doubled year-on-year, while IMS and customer experience were flat. This business line reflects quarterly volatility due to project milestones. All-in-all though, this activity, as Michel mentioned, is growing at 13% in the first nine months of the year at constant rate.

Wireless access grew 18% with LTE posting a strong performance year-on-year driven by the U.S. and also by growth in Asia-Pacific and EMEA. This was partially offset by a decline of approximately 5% year-on-year at constant exchange rate in legacy technologies.

Fixed access grow close to 6% year-on-year at constant rate with strong growth in copper driven by Americas and EMEA and fiber also witnessing good traction in the Americas.

Managed services, in line with our strategy, decreased revenues by 25% at constant rate, reflecting the results of our restructuring efforts.

Licensing activities generated €28 million in net income, up €5 million from Q3 '12 and also up from €16 million in Q2 '13.

Moving onto the following side, let's just look at the adjusted operating income and segment operating cash flow under our new structure.

Michel commented on this will be quite brief. core networking segment adjusted operating income increased from breakeven a year ago to 6.1% of segment revenues in the third quarter, driven by strong contribution of IP, improvements in both terrestrial optics and IP platform's profitability.

In excess profitability moved into positive territory, with fixed networks strengthening its profitability driven by a good mix and a good fixed cost, managed services nearly breakeven and a strong improvement in profitability of wireless.

Moving onto our balance sheet shown on the following slide, the net debt was €1.004 billion, sequentially increasing by €210 million from June 30, 2013. This is mainly due to the negative cash flow of €218 million we generated in the quarter.

The rest of the changes in our balance sheet are essentially due to ForEx variations and I will comment on pensions briefly in a second. In operating working capital, we saw a decrease of €64 million at actual rate normalizing for ForEx. It is a decrease of €60 million.

Within the various drivers normalized for ForEx inventories did increase in the third quarter by €35 million, primarily driven by the ramp up for preparation of large networks rollouts.

Receivables decreased by approximately €100 million and payable decreased by close to €20 million. All-in-all, this resulted in a €65 million negative impact in the operating working cash flow mostly explained by negative changes in inventories.

Turning to the following slide on the cash flow, we recorded negative cash flow of €218 million for the period which is an improvement by €148 million from Q3 '12. Going through the different lines, we see operating cash flow of €202 million, reflecting in part the negative contribution from the operating capital requirements of €65 million that I just mentioned, interest paid of €116 million. I remind you that we usually pay interest in the first and third quarter of the year and restructuring cash outlays of a €114 million.

The other line taxes, contribution to pensions and CapEx are in line with our expectations and relatively stable from one period to the other. Starting the third quarter with €4.9 billion of gross cash, we ended it with €4.4 billion.

During the period, we repaid close to €750 million of Oceane 2015, we issued new senior notes maturing in 2020 for $500 million. Those proceeds were used to reimburse our asset facility in the same amount.

On the following slide, you see the results of those actions. As we have now less than €450 million in bond maturities until the end of 2015, and a similar amount of maturities in 2016. Finally, on pensions, we have seen another quarter of improvement in the status, we have swung from slightly underfunded at the end of June to slightly overfunded at the end of September.

Under IFRS rules, this is an improvement of €250 million from the former period and more than €2 billion from the year ago. This move is particularly attributable to an increase in the discount rates even though at the much lower pace as the discount rate increases as you know, our liabilities decrease, therefore our funding status improves. I remind you that under U.S. pension plans that our U.S. pension plans are dictated by ERISA rules and other related regulations and according to that regulatory framework, we are fully funded in our U.S. pension plans which form the substantial majority of our liabilities and we do not anticipate any funding in the U.S. through at least 2016.

Thank you for your attention and Michel and I are now ready for your questions.

Michel Combes

Thanks, Jean. Let's turn to the Q&A.

Question-and-Answer Session


Thank you, sir. (Operator Instructions). The first question comes from Kai Korschelt from Deutsche Bank. Please go ahead.

Kai Korschelt - Deutsche Bank

Yes, hi. Thanks for taking my question. I had two. The first one was really about more the short-term. Can you talk about the strong (inaudible) French revenue growth? What numbers should we be thinking about roughly?

My other one then, was also, China, the rollout starting to ramp, there maybe a bit of a re-acceleration in the U.S., Sprint, Europe probably continuing to improve. So could Q1 potentially be better than seasonal from a revenue perspective?

My second one is really if you could provide a bit more color on the drivers of the gross margin improvement. It has been two or three quarters where you have beaten expectations. I am just wondering, how sustainable do you think this is? Thank you.

Michel Combes

Thanks. So three questions. On your first one. On the comment that I made around strong seasonal activity in Q4. Q4 is typically, as you know, a seasonally stronger quarter compared to the first nine months of the year. And without being too specific, we expect to see a strong end of the year with trends in core networking, IP routing continues to be driven by network transformation across the globe with IP transport gradually recovering. And in access, ultra-broadband rollouts, whether its wireless and fixed, continuing and let's say, with recent contracts that we have just signed.

Then your second question was, (inaudible) need long-term. You are right to say that U.S. remains strong. We are happy to see a 20% growth in this quarter, driven by investments of the major U.S. carrier. We just announced yesterday is the fact that we would be a strong, a main supplier of Sprint for the rollout of their 4G networks, so which should add, in terms of, let's say, potential growth in this country. So I expect U.S. to remain, let's say, driven by investments from the main U.S. carriers in the next coming quarters.

China is starting. So we reported already that we have signed with China Mobile and now with China Telecom has given us a great chunk of business in this country. China Unicom is still to come and they are planning in this country to rollout LTE in the next two to three years. So of course I don't give you any forecast per quarter, neither for Q1, but just trends that are in those regions. And as I have mentioned on different occasions, my expectation is that Europe which has been weak in the recent years should re-accelerate triggered by announcements such as the one made by Verizon. That's the reason why we were so keen to reestablish ourselves as well in Europe. We have been the strong this quarter in IP. We are historically strong in fixed access and we have, let's say, enlarged our position in Europe through the contract with Telefónica in wireless, giving us a good base to take benefit of, let's say, this growth when growth will happen in Europe. So that's more, let's say, for a trend.

Then your third question around gross margin. So I gave that, as was explained by Jean, the gross margin grew by 480 basis points compared to last year. Roughly speaking, half of the improvements is coming from IP routing and the other half from access. If I look on a quarter-to-quarter basis, so we have foresee an increase of 70 basis points compared to Q2 '13, which is mainly, largely a result of improvements in our fixed costs.

Kai Korschelt - Deutsche Bank

So it sounds like it is pretty sustainable. Thank you.


Thank you. The next question comes from Francois Meunier from Morgan Stanley. Please go ahead.

Francois Meunier - Morgan Stanley

Thanks for taking my question. Yes. I have got a question about, first, the working cap which has been a bit weak in the past two quarters. I think you are alluding to an improvement in Q4. Do you expect to recover all of the working cap you built in Q2 and Q3 or is it more like the 2014. If you could help with the seasonality and also I think it's quite interesting to see you managed to get $200 million out of China. Is there a scope to get more cash out of this region going forward? Thank you.

Michel Combes

First, our working capital. As, let's say, you have seen and I guess that it was also explained by Jean. The main impact that we have had in Q3 is due to inventory buildup in order to fulfill the forecast that we have for Q4 and avoiding stop and go processes in our business, which in my view, let's say, is the right thing to be done.

We will add some improvements in Q4 as usual, but I will be also keen to make sure that we have the right level of inventory in order to start the next year, meaning Q1 in the right position, so that's on working capital.

On China, so as we have said we have reduced the level of restricted cash by 200 million U.S. dollars. I guess that there is some potential to do more and so we will continue to seek for further decrease in the future.


Thank you. The next question comes from Gareth Jenkins from UBS. Please go ahead

Gareth Jenkins - UBS

Thank you, gentlemen (Inaudible). for the quarter. A couple of questions if I could on wireless in particular, and I just wondered especially on margins going forward you talked a lot of about the contracts wins that you have seen recent and typically when we have the overlay networks.

As I said, with lower margin, can you just give us some confidence with the revenue you are expecting from the wireless business that has not coming at lower margins either price or EBIT level.

Then second, I just wonder whether it changes your view around the potential disposals of asset pushing towards sustaining free cash flow position. Do you (Inaudible) further asset disposals, including wireless. Thank you.

Michel Combes

First on wireless. As you can see, we have a quite well distribution of our wireless contracts acquisitions in between Europe, U.S. and China. As you know, the level of margins is slightly different from one region to the other, so this distribution allows us to have let's say sustainable level of margin. True to say that when you are building a new position with new customers you have to invest a bit, let's say, at the beginning and what we are looking at is a profitability of these contracts on the period of those contracts. And more importantly, the cash generation during the life of those contracts, so I can let's say confirm that's what we are looking at, committed on and which is completely consistent with the plan that I have outlined to you back in June. That's the way we look and we take contract or by the way we refuse contracts when we believe that the level of profitability is not where it should be.

On, let's say your second point, we are committed to execute at least €1 billion of asset disposals. No matter what our operational performance will be, we are committed. It's part of The Shift Plan and we will deliver. We are actively engaged in this asset disposal program. As you know, I don't have a habit to comment on timing, but we will execute.

Gareth Jenkins - UBS

Michel, can I just follow up the first comment and just let me say typical project built in as a life time of the contract. So basically these contracts, a lot might see start eventually profit in the latter years as (inaudible) profile of these contracts as well.

Michel Combes

Well, let's say, in these type of contracts, when you start the rollout, you have some impact in cash because, of course, you have build inventory and the level of margin is impacted by the cost of the initial rollout. And then, let's say, during the course of those contracts, let's say, the margin is improving and, of course, cash is improving as well, but as we have different maturity of contracts in our portfolio, then the point is to have the right mix in terms of contract maturity, and again, the right mix in terms of geographical coverage, as let's say, the profitability of those contracts are different from one region to the other. So that's what we are looking at and when you look at, let's say, our margin in the access segment, you will see that that we are able to manage to that while preserving our margin in the wireless segment.

Gareth Jenkins - UBS

All right. Thank you.


Thank you. The next question comes from Sebastien Sztabowicz from Kepler Cheuvreux. Please go ahead.

Sebastien Sztabowicz - Kepler Cheuvreux

Yes. Hello, everyone. One question on cost savings. You are already in advance with your cost saving objective for 2014. Do you have any savings objective to share with us for 2014? Should we think about some thing quite now to reach the €1 billion target for 2015?

Also I have got a question regarding gross margins. It seems that the optics business contributed pretty strongly to the gross margin in the quarter. I remember that gross margin in optics were in the 17% range previously. Could you give us some color on where we were in Q3 and your mid-term objective for this specific business? Thanks.

Michel Combes

So on cost. Maybe one or two comments on the answer to your questions. One or two comments. Yes, at the end of Q3 we have delivered, we are in the target that I had given for the full year and which has allowed us to tell you today that we will exceed the target of €300 million saving in 2013, which is a good start in our cost reduction plan and give, I guess, full comfort on our ability to deliver the €1 billion when you know on top of that, I have already announced and present the way we were going to deliver the €1 billion with the 10,000 reduction of staff, which I made public a few weeks ago.

But your question was not exactly this one. Your question was assumption for 2014. Of course, we don't give precise assumption but I guess it's fair to, let's say, take what you have mentioned in terms of, let's say, profile of our cost reduction. As you can expect, we will do all what we can in order to even improve this profile but I guess that it's fair to take this profile.

On gross margins. So you are right on optics. You are right that we were below 20%. So much lower than our peers. So as you know, optics was one, and is one of my key focus, in terms of turnarounds for Alcatel Lucent. So we have been able already to deliver a strong improvement in gross margin of more than 10 points which means that, let's say, we are moving up. That's driven by the mix that I have explained. The 1830 plus the 100 gig cards. We are not yet where our competitors are, in terms of gross margin in optics. So we still have room to grow in order to be amongst the best-in-class as we should be.

Sebastien Sztabowicz - Kepler Cheuvreux

Okay. Thank you.


Thank you. The next question comes from Simon Leopold from Raymond James. Please go ahead.

Simon Leopold - Raymond James

Great. Thank you very much. I just wanted to ask about two things. One was around the trends in geographic mix and the implications for gross margin. Specifically, you are coming off a quarter with a very strong North American business and usually that's favorable to gross margin. And as we look out to 2014, I assume the geographic mix turns less favorable with U.S. carriers, at least guiding CapEx perhaps flat to slightly down. That's the first one. Is geographic mix the implication on gross margin?

The second one is, I think a even more challenging question, but I will ask it bluntly. As there has been a lot of speculation regarding the potential sale of your wireless business and I guess what I would like to see if you could address is I tend to believe wireless is very strategically important to Alcatel-Lucent given that that is so important to your top three customers, so if you could address the strategic element of your wireless business to some degree understanding it's hard to discuss sales of assets. Thank you.

Michel Combes

First on gross margins, I guess that what has been mentioned by Jean and myself, the improvement is a result of different bit and pieces, because that's correlated to product mix, the geographic mix and also our ability to drive costs down, so we will continue to drive our fixed cost down without any doubts. That's part of the €1 billion journey.

The product mix will continue to improve with, let's say, the strong push that we have on IP and which is a growth engine of the company and from a geographical point of view, I guess that we might have a slight evolution, but I expect U.S. to remain strong, because, let's say, even if the carriers are maybe flagging I don't know whether it's a decline, but at least let's say a kind of even level of CapEx. There is a new player next year which is going to invest quite significantly which is Sprint for which we have secured quite a strong piece of business. Then on top of that, we should have, let's say, Europe reignited a bit as well.

You are right that we might have a slight impact in terms of geographies, which will be in my view let's say much more than compensated by product and cost reduction, so that's for this gross margin. In terms of your second question around wireless, let me reiterate what I have already mentioned on different occasions. The focus of The Shift Plan is to reestablish the company on two pillars IP and platform on one side, ultra-broadband access on the other side, so that is what we are committed to do and to deliver

I guess that's the result that we have posted today show clearly that we are moving in the right direction, so my commitment to the investors is to deliver Shift and obviously to create optionality depending on what, let's say, and where the market will go long-term.


Thank you. The next question comes from Didier Scemama from Bank of America/Merrill Lynch. Please go ahead.

Didier Scemama - Bank of America Merrill Lynch

Good afternoon, and thanks very much for taking my question, and congratulation on a great execution there. Just would like to come back to wireless if I may, so if I look at the performance of some of your peers versus your performance, looks like you are taking a fair amount of market share in Q3 and that's going to continue in Q4. Then if I look also at the contracts you have announced recently, whether it's with Telefónica in Spain or China Mobile or maybe the things that you are talking about in Europe. Can I conclude from that, that, A, your seasonality in Q1 is going to be probably a bit more muted unusual? Second, that low share gains could be a bit more, let's say, sustainable than we would have thought.

Then related to that when I look at the profitability of the wireless division, I could be doing the math wrong, but it seems like that the run rate of losses is in the range of nearly €250 million to €300 million. Therefore given the comments you just made on the dynamics in the U.S. and potential sustainability of those share gains, would it fair to say that your operating losses in wireless in could significantly decline next year as you also cut cost dramatically? Thank you.

Michel Combes

Several questions there. Of course, I will not give you any detailed indication on a specific quarter. I guess, that let's say you can take as a fair assumption that our share gains are sustainable. The major reason beyond that is that, let's say, this level of activity that we have been able to secure in wireless is based on move, transition from the market, towards overlay networks. So that is, let's say, something which has accelerated in the past few quarters and, of course as you know, strategy that I have, let's say, elected to implement within Alcatel Lucent is to focus exclusively on overlay network which has allowed us to capture those new contracts which are really overlay based, whether it's Sprint in U.S., whether it's Telefónica in Spain or whether it's China Mobile and China Telecom in China, and I expect some other operators to move in that direction in the next coming quarters, as it appears that overlay is easier to implement and will, long-term, deliver a better total cost of ownership. I don't want to enter in a religious battle there but I guess its what, let's say, the market seems to trend towards. So therefore your second point, in terms of shares and sustainability of shares.

On your third point. As you can expect, we are disclosing results for our access segment as a whole. So I am not giving you details for each pieces of the segment but it's fair to assume that we will have an improvement in our wireless business. We have, let's say, as a growth that we have posted. The refocus of our R&D. The shift of our R&D towards carry exclusively 4G, meaning that, let's say, we have, as I mentioned, when I launched The Shift Plan, we are shifting our R&D resources carrying only to LTE in order to sustain this growth and we will have the benefit as well of the cost reduction that we are managing within the company. But I will not give you a precise figure except the one which was given for the segment as a whole.

Didier Scemama - Merrill Lynch

No, thanks. That's pretty clear. Thanks very much, Michel.


Thank you. The next question comes from Eric Beaudet from Natixis. Please go ahead.

Eric Beaudet - Natixis

Yes, hello. Thanks for taking my question. Mine is regarding your licensing activity. We have seen a rebound this quarter after two quarters of strong decline. I was wondering what exactly changed there? What have you done strategically different? And what has explained the strong decline in the first half? So basically, how are you addressing this market differently today than you were three months ago? And how should we see that activity going forward? Thank you very much.

Michel Combes

So as you probably remember for many years, I guess that Alcatel Lucent was not so focused on licensing. Then when, let's say, licensing start to become hype in the industry, Alcatel Lucent decided, let's say, to focus a bit more on it. And last year elected to ask an external partner, external provider to act on behalf of Alcatel Lucent to monetize their patents.

It didn't work but, let's say, the result of this was that, of course, Alcatel Lucent stopped all its internal efforts which were limited but which did exist a bit, and was only relying on the external efforts of this partner. At the end of year, let's say the external partner was disconnected, and so when we jumped in, we were in the position where didn't have any external partner and no internal effort were organized.

So what we have done is, let's say, to restructure our internal teams in order to reignite a program of patent monetization, hiring, let's say, a manager for this segment coming from Nokia and, let's say, rebuilding a team. We have, let's say, a much more focused approach. As I have said, it takes time to build, let's say, this type of staff. So which means that when you look at first half we were quite weak.

Third quarter we, let's say, have been able to generate €28 million. I said that actions that have already been implemented shall further improve our performance in the coming quarters, which should allow us to, let's say, be on a run rate above €100 million, which is very encouraging and which is consistent with the target that (Inaudible), but again that's let's say one of the processes that we are fixing taking a bit of time and making sure that we are doing the right steps


Thank you. The next question comes from our Achal Sultania from Credit Suisse. Please go ahead.

Achal Sultania - Credit Suisse

Thanks for taking my question. Just coming back to the U.S. business, one of your competitor is talking about two large broadband projects actually peaking in their mix. I am just trying to understand, where you are in terms of project cycle with your customers? Are we already through the initial rollout part going forward or should actually expect more software capacity additions just in terms of mix what it means for 2014?

Then a follow-up on the cash restructuring for the full year, Michel, I think you mentioned somewhere close to €700 million of cash restructuring for 2013. I think you have taken about €325 million-odd so far in the first nine months. Should we expect a significant increase in Q4 cash restructuring charges? Any color on that would be helpful? Thanks.

Michel Combes

Two questions. The first one is little bit difficult for me to comment on what my competitors are saying. What really I can just comment is that as you know we are one of the main suppliers of two biggest customers in the U.S. and we have just been awarded let's say significant contract with the third one, so which means that of course we are packed and, let's say, we have a strong role in the rollout of LTE in the U.S. which is still moving very fast, so first in terms of coverage and now in terms of densification from what has been let's say mentioned by Verizon and/or AT&T.

Then these points on software versus hardware is a bit, let's say, difficult for me because at the end of the day most of the content of the products that we are delivering to our customers is software-based. I mean, I don't know exactly what it means, so what you can have in mind is that yes and we are probably the only wireless vendor to be backed off three large rollouts in U.S. from AT&T, Verizon and Sprint. Probably we are the only one to be part of those three, let's say, deployments.

Then on your second question, which is on cash restructuring, as you have accurately said we have spent €328 million of cash on cash restructuring outlays for the first three quarters, and we now expect to spend around €600 million for the full year instead of the first initial comment that I had made, which was of €700 million. Let's be fair that the biggest part of it is timing.

I guess that probably on this one as we are just at the end of our one-hour call. I would like to thank you all for all the questions which have been raised and I hope to see you at our Technology Symposium, where we will brief you more on, let's say, where we intend to invest and to drive the company moving forward.

Thanks to all of you and see you there in Mario. Bye, bye.

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