Alcatel Lucent Société Anonyme Management Discusses Q4 2013 Results - Earnings Call Transcript

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Alcatel Lucent Société Anonyme (ALU) Q4 2013 Earnings Call February 6, 2014 7:00 AM ET


Michel Combes - Chief Executive Officer and Director

Jean Raby - Chief Financial and Legal Officer


Francois Meunier - Morgan Stanley, Research Division

Vincent Maulay - Oddo Securities, Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Didier Scemama - BofA Merrill Lynch, Research Division

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Sébastien Sztabowicz - Kepler Cheuvreux, Research Division

Gareth Jenkins - UBS Investment Bank, Research Division


Welcome to the Alcatel-Lucent Earnings Conference. We will leave the floor to Michel Combes.

Michel Combes

Thank you. Good afternoon, good morning to all of you. I am pleased, with Jean Raby, to present to you our Q4 and full year '13 earnings. Starting with the top line. Excluding currency impact, as you can see on Slide 4, 2013 marked our group's return to 3% year-on-year growth at constant rate and commercial traction. Throughout the year, we have been able to announce key customer wins, Sprint, Telefónica, China Mobile, China Telecom, Verizon to date, and gained market shares in key targeted areas. Q4 was up slightly less than 10% sequentially at constant exchange rate, with notably a solid end-of-year performance in Core Networking at plus 16%.

Most importantly, as this is among my top priorities, Q4 and 2013 marked a significant turnaround in profitability. Our adjusted operating income moved up massively by more than EUR 0.5 billion between 2012 and 2013, bringing margin from minus 1.8% to plus 2% of our revenues. This performance has been notably driven by an improvement in our gross margin. And as I was committed to, by a significant decrease in our fixed cost, we achieved EUR 363 million fixed cost savings over the full year, well over the top end of our initial range of EUR 250 million to EUR 300 million for full year as we had indicated at the end of Q3.

As you know, another of my key priorities is cash flow generation. In Q4, we generated EUR 363 million of free cash flow, improving by EUR 119 million compared to Q4 2012 when excluding restructuring costs. In 2013, as a whole, the relatively stable amount of outflow reflects 2 diverging trends: massive improvements in operating income I was talking about earlier largely offset by higher restructuring charges, EUR 182 million; a negative change in working capital, EUR 102 million; and higher interest expenses, EUR 93 million, on which I am sure we'll come back later during the Q&A.

I will comment in the coming slides our Shift Plan progress, which is well underway. On this basis, we reiterate our 2015 Shift Plan guidance and reaffirm our focus on cash generation and profitable growth. Turning to next slide. Just would like to provide an overview on the progress we have made with The Shift Plan since its launch 7 months ago.

First of all, this is an industrial transformation plan. And we are repositioned as a specialist in IP networking, let's say, IP Routing, WDM, cloud and ultra-broadband, namely fiber and vectoring for fixed and LTE. So the transformation is enriched by the achievements we made in innovation. To comment on a couple of them, let me highlight that the Alcatel-Lucent and Qualcomm partnership is now up and running, with codeveloping teams working together in the domain of small cells to deliver the first multi-standards product with WiFi in the next coming months. The virtualization roadmap is progressing, with the inclusion of EPC and IMS, and we entered into a phase of 8 trials and proof of concepts, including with some Tier 1 service providers.

Our overall R&D effort was maintained at roughly EUR 2.3 billion in 2013, but is being refocused on IP networking and ultra-broadband technologies. While legacy R&D spending represented 35% of total R&D spending in 2012, ratio decreased to 28% in 2013, 1/3 through our target of 15% by 2015. In the coming slide, we will review our main business lines in more detail. But you can notice on this one that, overall, the implementation of The Shift Plan is progressing according to the plan, I might even say quicker than the plan. Just reminding you that the plan has to started just 1 semester ago.

Looking now at the financial aspect of The Shift Plan on Slide 6 and reviewing its progress against our 3x EUR 2 billion targets. You may remember that we have a goal of self-financing the cost of the plan based on our own efforts. I already mentioned the very good progress in the fixed cost savings, with more than 1/3 of our target achieved. We announced in December the disposal of LGS, our subsidiary for the U.S. federal government. Today, I am also pleased to announce the disposal of 85% of our Enterprise business to China Huaxin, a technology investment company. If we add a few other minor assets, we are now exceeding EUR 350 million of disposals. As you know, the second half of the year has been pretty active for us on the capital markets, which has allowed us to considerably strengthen our balance sheet. We have now largely reprofiled our debt, and the remaining maturities until 2017 are all pre-financed.

Turning to the last targets. We increased our capital by EUR 1 billion, essentially through a successful rights issue of EUR 957 million completed by the conversion of the remaining part of the OCEANE 2015 for EUR 48 million. Let me also point out to the fact that our 625 -- EUR 629 million 2018 OCEANE is deeply in the money, with an underlying conversion price of EUR 1.70.

Before moving into more quantified comments, let me come back on our strategy. To remind you of a slide, Slide 7, that I shared with you during our tech symposium in November on the East Coast. We view 2 major transformations that are driving market trends within our industry. One, network and cloud infrastructure are concretely intersecting. It means that the network is inviting itself into data centers, providing quality of service for individual user and for user looking for specific service. This is done thanks to the carrier-grade IP Routing and this is SDM.

Simultaneously, the cloud is also inviting itself in the network, these main network functions being virtualized and ported on servers in the cloud. This is NFV. The second move that, let's say, we see or the second transformation is the emergence of ultra-broadband access due to the rush for bandwidth and the proliferation of devices of any kind, from smartphone to tablets to connected device.

In contrast to previous technology changes, these transformations affect also industry players beyond the telecommunication industry. The IP and WDM technologies are already recognized and deployed by cable operators. They are now extended to technology-centric enterprise like transport, utilities, governments, as they need the same high reliability and quality. With the cloud shift, the IP/MPLS technologies will able to penetrate the data centers and address fast-growing web scale and hosting companies.

Likewise, the telcos are not anymore the only target of fiber and LTE technologies. Cable providers are already adopting PON. We also see increasing government initiatives, either in FTTx, wireless or with public safety that will reshape the broadband market in many countries. It is this type of market trends that we look to capitalize on and is a key part of our Shift Plan. And every day, the announcement of the different service providers show that they are really moving in that space, giving us a chance to compete in an even better manner.

Turning now to Q4 and full year results, as you see on Slide 8, where the key figures are presented. At constant rate, revenues in Q4 were flat year-on-year, up 9% quarter-on-quarter. Core Networking grew a solid 16% sequentially despite IP Routing being down 3% quarter-on-quarter. In particular, we saw strong seasonal performance in our IP Platforms and IP Transport.

In view of the disposal of LGS and of 80% of Enterprise, we also provided an aggregate Core Networking plus Access only, our 2 main segments. This adds an additional 0.5 percentage point to the revenue growth rate. Core Networking segment adjusting operating margin was 15% of revenues in Q4, which represents 450 basis points of improvement year-over-year, led primarily by IP Transport and IP Platform. As far as Access is concerned, let me remind you that this segment is primarily managed for cash. In that respect, Q4 is in line with our goal. We have a segment cash flow growing roughly 40% at EUR 223 million. Revenue-wise, wireless had a pretty decent performance, up 6% quarter-on-quarter while the impact of the Chinese rollout is not yet fully reflected. Remember also that Managed Services has gone through a restructuring phase, implying priority to profitability instead of revenue growth.

Overall, IP Routing, as you can see on Slide 9, enjoyed a strong performance over the full year. We have systematically grown at a double-digit rate over the past 3 years while our revenue base has grown bigger over time. Out of an overall market that is expected to have grown 7% to 8% in 2013, this means, without any doubt, that we continue gaining market share as we have seen based on the Q3 figures.

Looking at IP Routing. Over the last few years, the first phase of growth has undeniably been driven by the increasing capacity requirements, notably in mobile networks with large LTE rollouts. This has enabled us to reach a strong #2 position in edge routing and the leading position in mobile backhaul. We are now entering in a new phase of footprint expansion, led by ever-increasing capacity requirements and continuing all IP transformations. Some of the next steps are already tangible. We were successfully selected by U.S. and Chinese operators for their evolved packet core. We started 2013 with 6 wins in XRS core routing and ended the year with 20 wins. This is a solid basis that paves the way for future growth.

Looking ahead, our Nuage network venture focused on SDN solution is aimed at developing an open-software-based solution to address key data center network constraints that limit cloud service adoption. Trials for Nuage started in Europe and North America in April, and less than 1 year later, Nuage successfully recorded already 3 commercial wins, including UMPC (sic) [UPMC], the university medical center of Pittsburgh, one of the public initial trials. I should even say 4 as we just recorded 1 additional win in France this morning, being the first one in our EMEA region. The UPMC win is also interesting in that it shows our ability to move towards more diversified customer basis and notably, cable operators, vertical businesses, such as health care, large financials, utilities or web scales, which have carrier-grade requirements.

Moving to IP Transport on Page 10, which is formed by terrestrial optics and Submarine. 2013 has been an inflection point -- inflection year, sorry, both in terms of revenues and profitability that we were shooting for. From a revenue standpoint, we have witnessed a progressive move towards stabilization during the year. This is better evidenced if we look at H1/H2 profile, with the second half of 2013 showing stability compared to the second half of 2012.

In terrestrial optic, this was mainly driven by WDM deployments. Over the full year, WDM has been growing at mid-single-digit rate while legacy Optics continued to decline although at a reduced pace compared to 2012. We now hold very strong market position with our 1830 PSS, present in 44 of the top 50 service providers worldwide. Further to the recent SFR win that we already reported on, today, I am happy to announce that Verizon has selected the Alcatel-Lucent 1830 Photonic Service Switch as a key element in its continuing move to an all-IP optical network. We look forward to working with Verizon on this important project. And as you all know, that's a real key milestone in the turnaround of our Optics segment to reenter in the U.S., which is the healthiest market for optics.

The 100 gig adoption is accelerating, and we shipped more 100-gig cards in 2013 than in 2010, '11 and '12 in aggregate. Those gains in WDM and 100 gig have enabled us to turn around the division and generate a strong improvement in gross margin in second half. And the realize that Verizon has selected us is also demonstrating the quality of the product and the competitiveness of our product now in that space.

In Submarine, as you know, the activity is very cyclical. After having reached a trough in the first half of 2013, the recovery is now well underway on the back of a solid order book. With the 12 contracts signed in 2013, we have a solid path for growth ahead of us and new contracts to come.

Turning to IP Platforms. Beyond quarterly volatility, 2013 was a significant turnaround year, with revenue growth plus 6% at constant rate and improved profitability. The 4 key drivers to 2013 are: first, IMS and Subscriber Data Management, which in aggregate grew at 15% in the year, driven by LTE deployments, including Voice over LTE. Second, Customer Experience solutions, including Motive, which grew at high-single-digit rates, driven by the increase in the ultra-broadband services and devices. In particular, Motive managed 45 million devices, an increase of 80% year-on-year.

Third, portfolio rationalization had a material impact on profitability, notably through the exit of application enablement, mobile commerce and ICC payment solutions. Such rationalization has resulted into a substantial improvement of the IP Platform profitability in the year. Finally, our NFV platform continues to develop momentum in the industry. In Q4, IP Platforms began 3 new trials of CloudBand and virtualized applications proof of concepts with Tier 1 service providers, bringing the total to 8 at the end of 2013. Within our virtualization portfolio, we have now different products, our CloudBand management system, which is a key enabler for the virtualization, and some functions I already mentioned, EPC, IMS, and obviously, Motive.

On the next slide, and I guess this one is important as well, we, let's say, give few more highlights on our Fixed Access division, which is -- I strongly believe, is a typical illustration of a successful turnaround of a business from legacy to ultra-broadband that we have delivered in fixed and which is a model for what we want to deliver in wireless as well. What has happened? A wave of national broadband initiatives, either in fiber rollout or in copper revitalization of existing networks, an intense flow of innovation in the last few years. As an example for copper, we went from DSL to bonding to vectoring and then now to in order to offer increased throughputs to the end user, a drop in the legacy technologies and a change of the model for the most commoditized part of the business, the customer premise equipment, the famous ONT.

Such turnaround was successful and resulted in a 5% growth at constant rate over the year, with a strong contribution to profitability at a double-digit rate and then to cash. Just to even illustrate 1 step more, in aggregate, we delivered a 27% growth in copper and fiber product, defined with fiber plus ONT plus OLT. So a quite successful story in this space, which is not always well perceived.

On the Wireless side, as you know, we made the choice of LTE overlay, I'm on Page 13, the choice that we believe is going to be increasingly embraced by the industry. In terms of LTE CapEx, we estimate that the share of overlay has increased and should continue to do so in the coming years. LTE overlay was the choice of main U.S. service providers, and it has also been selected by China Mobile, Telefónica and market challengers or greenfield service providers like Osnova in Russia. It is our belief, based on modeling made by Bell Labs, but also real operational experience with some customers, that LTE overlay allows for speed to market and launching at scale. It is less complex, allows better performance as there is no need to touch existing equipment. Roughly speaking, it enables in the range of 40% to 50% time savings for implementing.

On small cells, more and more operators are engaged in trials that are expected to turn into rollout within a 2- to 3-year time frame as all those solutions have to be industrialized. As LTE and small cell technology continues to gain in importance, this is also visible in our R&D investments, with these 2 technologies representing now more than 60% of our R&D spending in Wireless in 2013.

The impact -- if I turn to, sorry, to Slide 14, which focus on Managed Services and licensing. The impact of addressing the 15 margin-dilutive contracts in Managed Services resulted in a strong improvement of profitability. For a second consecutive quarter, the business was close to breakeven. We gained approximately EUR 130 million in adjusted operating income over the full year in Managed Services. We can now consider to reposition this business now that we have sustainable platform around 2 services: transforming the operators' network from technology and operational perspective, as highlighted, for example, by the project that we are conducting to KPN; and what we called BOMT solutions, build, operate, manage and transfer solutions, which is a comprehensive solution for customers that need to efficiently roll out, operate and manage a new next-gen network. Primary focus is on our own equipment, which is a fundamental difference with the past. In that domain, our last wins were for fiber service providers in Spain or for Airtel in Africa, covering 17 countries in IP/MPLS.

For the last activity of the Access segment, licensing, it is an activity that, as I told you at previous results presentation, is being reset. In Q4, we had EUR 15 million of licensing revenues and EUR 27 million of patent disposals. This means that we now have an annualized run rate of close to EUR 100 million for that activity, as I had committed myself in -- also when I presented The Shift Plan, coming from nearly nil.

I will now leave the floor to Jean Raby for the financials. And then I will conclude on key trends we envision for 2014.

Jean Raby

Thank you, Michel, and good afternoon or good morning, everybody.

Let me now turn quickly to Slide 16, where we show again our P&L on a Q4 and 2013 adjusted basis. Adjusted, I remind you, refers to the fact that we exclude the negative impact entries from purchase price allocation that dates back to the Alcatel-Lucent merger in the mid-2000s.

So as Michel mentioned, revenues were flat at constant exchange rate in Q4 and up 3% for 2013 as a whole. Given the disposal of LGS and 85% of Enterprise, we have indicated earlier that Core Networking and Access, going forward, will be our 2 segments. And on a pro forma basis, these revenues increased by 3.6% for the year at constant exchange rates. Allow me to mention that LGS will remain consolidated until actual disposal. Enterprise, given its size, will, going forward, assuming we sign a definitive agreement, as a discontinued operation on deal closing.

Gross margin for the group reached 34.3% in Q4, the highest ever level in the last 2 years. This represents an increase of close to 4 percentage points compared to Q4 2012, reflecting favorable mix and reduction in fixed costs. This improvement was across the board through each of the business lines, driven especially by IP Transport and Access, both fixed and Wireless. Over the year, gross margin reached 32.2% compared to 30% in 2012, and again, a function of mix improvement and strong performance for IP -- from IP Routing, Fixed Access and the significant turnaround in Managed Services.

Operating expenses were down 7.7% in Q4 compared to Q4 2012, mainly driven by the sharp decrease in SG&A of more than 13%. Over 2013 as a whole, operating expenses decreased by 6%, again essentially in SG&A as we continued to make the right trade-offs between financing our new technologies and legacy technologies in R&D spending. As a result, we have made good progress in reducing our SG&A sales ratio, reducing it by about 160 basis points to 14.1% in 2013. We're not going to stop there, and we're going to continue to be very focused on bringing that ratio more in line with industry standards. As I mentioned, our overall R&D effort is maintained and is now at about 16% of revenues in 2013, and we continued to refocus towards next-generation technologies.

All in all, adjusted operating income improvement continued in the fourth quarter, within a margin of 7.8% of revenues, up 5 percentage points versus Q4 last year. For the full year, the turnaround is sizable. If not -- it's very significant, with an adjusted operating income that is up by more than EUR 0.5 billion. Net income for the group was positive in Q4 at EUR 134 million, the first time in 2 years. That represents about EUR 0.05 a share. Over the full year, you may have seen that net income is down EUR 1.3 billion, but it reflects net asset impairment charges of EUR 548 million, as well as substantial restructuring charge, which we see as an investment for the future, and an increase in financial expenses tied to the active management of our balance sheet, which has not only addressed our immediate balance sheet concerns but also lengthened maturity of our debt and going forward, as we've been able to engage into yield-minimizing actions, a reduction in interest expense going forward.

Moving to Slide 17. Let me give you a bit of highlights on the revenue by region. In North America, growth slowed down in the fourth quarter of 2013 compared to 2012 to 2% after a very strong growth posted in earlier quarters. Over the full year, though, North America remains up 14%. Verizon, AT&T and Sprint remained 10%-plus customers, and we see good momentum in, notably, IP Routing, LTE rollouts and capacity extensions, as well as in fixed network and Optics as highlighted by the -- in our announced selection as a provider to Verizon of our 1830 PSS platform.

The Asia Pacific region recorded 10% growth year-on-year in Q4, benefiting from the beginning of the LTE rollouts in China. For 2013 as a whole, the region reported a modest 1% growth, with Japan slowing in the latter half of the year. Europe was flat in Q4 and down 3% as a whole for the year. But after a weak Q1, the region has stabilized over the second half of 2013. I remind you that Europe was down 17% in fiscal year 2012. In the rest of the world, Middle East and Africa, as well as CALA, decreased in Q4, with a high comparison base for CALA in Brazil and a still complex regulatory situation in Mexico.

Moving to the following slide. Some of this has already been mentioned by Michel, so I'll try to be a little bit targeted in my comments. IP Routing recorded double-digit growth for the year at constant currency, as has been the case in the last 3 years. Q4 was impacted by a temporary pause in end-of-year spending from some service providers. IP Transport confirmed its improvement. The pace of decline in terrestrial optics slowed down while Submarine Optics, as Michel mentioned, accelerated its recovery during the quarter.

IP Platform revenue profile, as usual, is not linear from quarter-to-quarter, really tied to contract milestones. Q4 was down 6% year-on-year off a strong comparison base. But over the full year, the division grew by 6.2% at constant exchange rates, driven by some of the factors Michel mentioned, notably IMS and Subscriber Data Management traction and Motive, Customer Experience. That is -- that grew in the high-single-digit growth rate.

In Access, Wireless recorded strong performance in Q4 and for 2013 as a whole, driven by LTE rollouts. Fixed Access grew in the quarter and over 2013 as a whole. And again, as Michel mentioned, copper and fiber in aggregate grew 27% of revenues. That more than offset the decline in legacy technologies.

For Managed Services, the top line, of course, is decreasing, reflecting the impact of our vigorous restructuring efforts to turn around the business line on a profitability basis. Licensing revenues were EUR 15 million in the quarter. When I add to that EUR 27 million of revenue generated from patent disposals, it brings a total inflow from that part of our business to EUR 42 million for the quarter, and that represents EUR 104 million total from Licensing revenues and patent sales to -- for the full year.

Moving on to the following slide, which shows adjusted operating income and segment operating cash flow. Core Networking, as mentioned, recorded adjusted operating income of EUR 257 million in Q4, giving it a margin of 15%. Year-on-year improvement was driven by IP Transport and IP Platform. Over the full year, Core Networking operating income more than tripled to EUR 472 million, resulting in an operating margin increase by more than 5 percentage points to 7.7%. I'll remind you that we're coming from 2.3% in 2012, and as we've said in The Shift Plan target for 2015, we aim to be at or above 12.5%. So in the first year, we have done nearly half of the improvement [ph] needed to get there. Each business contributed to this improvement and strong cash flow generation of Core Networking, with segment operating cash flow of EUR 475 million over 2013. That was up as a whole from EUR 307 million in 2012.

In Access, we showed operating income of EUR 76 million for the quarter, 3.8% margin, which is a swing of EUR 143 million from Q4 2012. It's the second quarter in a row that this segment records an operating profit. Fixed networks continued to record very solid margins, driven by a good mix and the good control of fixed costs, while Wireless and Managed Services improved their profitability. Turnaround in Access is also reflected in the segment operating cash flow, which was EUR 233 million in Q4 compared to EUR 160 million in Q4 2012. For the full year, the -- we have an outflow of EUR 137 million compared to EUR 105 million in 2012. But if you exclude what we consider to be a particularly weak first quarter of 2013, this metric has regularly improved throughout the year.

Fixed costs on Slide 20. We've tried to be a bit granular to show you the evolution from quarter-to-quarter between fixed cost savings and what we call FX and others, which reflects other variations that affect our overall fixed costs. The results we show is the result that Michel highlighted, i.e. EUR 363 million of fixed cost savings improvement throughout the year. And of that amount, about 3/4 was attributable to SG&A recorded in our P&L and the remaining portion largely in fixed operation costs.

Going on to -- moving on to Slide 21, which is the cash flow statement slide. We generated EUR 363 million of cash flow in the quarter. It's important to be granular here because when you actually take out the variation from Q4 '12 to Q4 '13 in respect of restructuring cash outlays, which, again, we see as an investment in the future and as part and parcel of The Shift Plan restructuring and repositioning of the company, free cash flow for the quarter actually improved by EUR 119 million. Looking at the full year, total free cash flow was negative EUR 636 million. Again, important to be granular because if one excludes the variation from 2012 to 2013 in restructuring cash outlays and in interest paid, given, as I mentioned, the strong and vigorous action we have taken to proactively address our balance sheet issues and of course, refinance sometimes dated low-yielding debt with current yielding debt, we have free cash flow improvement of EUR 324 million from 2012 to 2013.

Footnote. As far as restructuring cash cost is concerned, we recorded an outlay of EUR 522 million, which is lower than the EUR 600 million we had indicated in the past. This is mostly a matter of phasing and timing and will flow through in 2014. At the announcement of The Shift Plan at the end of June, we had net debt of nearly of EUR 794 million. Thanks to the rights issue and the improvement in operating cash flow, we closed the year on a net cash position of EUR 149 million.

The following slide shows some KPIs we had indicated as part of The Shift Plan that we would give to the marketplace on an annual -- or a more regular basis. Let me -- allow me to draw your attention to our headcount reductions. We are, of course, in the process of engaging in information and discussions with the unions. That process is going on and is on track. That being said, though, at the end of 2013, the workforce of the group was 64,000 people, which is down 12,000 for the year, including the adjustment for contractors. Going forward, we're also working proactively in outsourcing certain parts of our support functions, which we believe will improve not only efficiency but also reduce costs. Finally, global productivity, as measured by revenues to headcount, increased by 18% in the year to EUR 210,000 per person.

The following slide just summarizes our active balance sheet management.

As Michel said, our debt reprofiling exercise is largely completed. And as you can see, the contrast between the 2 slides is startling really. We have really repositioned our yield along a timeline of the next 7 years, and the average maturity comes out to that, actually 6.9 years. Another thing that I think is worth pointing out is that we have been able to successfully reprice our 2018 senior secured credit facility, not only reducing its actual amount outstanding from what was an initial EUR 2 billion to what is now EUR 1.2 billion, but also reducing twice its yield, and the total reduction is 275 basis points. The average yield of our total debt now is 5.9%, lower than at the beginning of The Shift Plan despite this longer average maturity.

Moving on to the following slide. We have taken the position of trying to be a little more granular in our comments on the funded status of our pensions and OPEB, so allow me to be a little more verbose on this slide than we usually have in the past. In U.S. pensions, you may recall we have 3 tax-qualified defined benefit plans. These plans are collectively overfunded. We also have smaller -- much smaller nonqualified supplemental plans, which have been set up for historical specific reason over time. We also have U.S. OPEB plans, which are designed to provide health insurance and life insurance benefits to retirees.

The good thing is that the surplus in our U.S. pension plans is of such size, and you see it, it's about EUR 3 billion, that we can use according to U.S. regulations. That surplus defines the contribution that we need to make to the U.S. OPEB plans on a yearly basis to fund the obligations under those plans. So all in all, the only cash contribution that we have on a recurring basis in respect of our U.S. plans is really the cash contribution we need to make to those nonqualified supplemental plans. And the surplus in our U.S. pension plan is of such size that given the profile of our population and the expected benefits we expect to pay for the retirees, we believe that surplus is sufficient to address the funding needs of the U.S. OPEB plan for the foreseeable future.

As far as our non-U.S. plans, then, it depends on local regulations. France and Germany notably require annual contributions, there is no funding requirement, while the U.K., Netherlands do have some funding requirements.

So overall, in 2013, we have pension contributions of EUR 189 million, 3/4 of which was related to the European plans and the remaining portion, really, to the U.S. plans I mentioned, the nonqualified supplemental plans.

Finally, a word on our asset disposal program. Michel has mentioned both these assets. On LGS, punchline is that closing is subject to certain conditions. These conditions are in the process of being met. We are targeting closing in Q1 2014. And this morning, as you've seen, we have announced the signature -- the receipt of a binding offer from China Huaxin for the acquisition of Alcatel-Lucent Enterprise, and we are engaging in exclusive negotiations with China Huaxin.

This transaction values Alcatel-Lucent Enterprise on an EV basis, debt-free, cash-free, at EUR 268 million and at an estimated EUR 237 million on an equity basis. We will retain a minority interest of 15%. We are now engaging in the necessary consultation and information processes with the union representatives, Comité de [indiscernible], notably. We expect a definitive agreement to be signed in Q2 2014. And then we have to go through a number of regulatory authorities approvals. That probably means that the closing will occur in Q3 2014.

I've tried to be as quick and efficient as I could. And I'm now pleased to turn the microphone over to Michel for conclusion.

Michel Combes

Thanks, Jean. I would now like to conclude by giving some color on 2014 business trends. Starting with IP Routing. We have a solid ground for continuing double-digit growth based on our strong #2 position in edge routing and further expansion in core routing, EPC and data centers. Those markets are expanding, and based on our customer wins, we are confident we can grow faster than our addressable market.

Moving to IP Transport. We expect the division to benefit from both terrestrial and Submarine positive trends. Capacity requirements will continue to drive upgrades in terrestrial optical networks. We've transitioned to 100 gig and beyond 400 gig. Based on the progress achieved for 2013 and our recent customer wins, we are confident that we are well positioned to capture those market opportunities. As for Submarine, the cyclical low is now behind, and recovery ahead of us is supported by a very strong order book. The evolution of IP Platforms should continue to be dual, with the core businesses managed for growth, IMS, SDM, Motive, cloud; and mature businesses managed for profits, messaging, NGIN, with the resulting continuing improvements in profitability.

In Wireless Access, momentum from large LTE rollouts will continue, notably driven by China now entering Phase 2 rollouts. But we also expect North America to remain solid and new opportunities to emerge in EMEA. 2014 should also be a significant year for small cells where early adopters across the globe will begin to deploy in scale and additional technology adoption by fast followers. In Fixed Access, the drivers of 2013 should continue to play. The race for more broadband will carry on, driving demand for vectoring and fiber. On top of this good market fundamentals, we maintain our focus on expanding our footprint by expanding on our customer base, notably cable operators.

So to conclude, on Slide 28, I would say that our Shift Plan is well underway, and we are confident that we will hit our 2015 targets. So we reiterate our guidance. As a reminder, our targets are the following: Core Networking, at least EUR 7 billion revenue and 12.5% operating margin; Access and other, segment operating cash flow of at least EUR 250 million. While substantial progress has already been achieved, we do not slacken off our focus on cash generation and profitable growth.

Thank you for your attention. And now let's open the Q&A session.

Question-and-Answer Session


[Operator Instructions] The first question comes from Francois Meunier from Morgan Stanley.

Francois Meunier - Morgan Stanley, Research Division

This is Francois. Clearly, you had a very, very good quarter, congratulations. I was just wondering if you will give us a feel about seasonality in 2014 and how do you feel the U.S. is doing at the moment. As you noted in the press release, it has been like a deceleration of growth over there. Do you think it's going to be a bit of a tough comp in H1 and then recover in H2? If you could tell us anything about this, that would be really helpful.

Michel Combes

So thanks for the question. As you know, I never provide, let's say, specific guidance, but just some color on, let's say, what we see. As far as the U.S. is concerned, I guess that, let's say, what happened in Q4 was consistent with what we had said, meaning that, let's say, U.S. would remain robust. And we posted in Q4, of course, let's say, a lighter growth than in the previous quarters, but we still posted a growth year-on-year in terms of revenue. I guess that we were probably one of the very few to do that. And I had, let's say, clearly stated that it was based on the fact that we were, at least in Wireless, the only vendor to be present in the 3 major customers, meaning Verizon, AT&T and Sprint. As far as 2014 is concerned, I can just read what has been announced by, let's say, the operators themselves. We have Verizon, which has clearly stated that they will continue to invest but the level of investment, which would be -- which should be in between minus 1% and plus 3% compared to this year, so still a very robust level of investments. And the same for AT&T, which had first driven the market to a slightly low investment and which came back, let's say, during their results disclosure to the same level of investment for 2014 compared to 2013, so which means a robust level of investment at AT&T as well. We should also see some new rollouts in the U.S. from the other operators. We have, let's say, investments which have been flagged by Sprint and T-Mo for which the seasonality is a little bit less clear, of course, with all the discussions or all the rumors which are underway. So all in all -- and let's say, we're not speaking about the Tier 2 players, which are also migrating to LTE. So all in all, I expect, let's say, U.S. investments to remain robust. Of course, not a huge increase as we have seen '13 compared to '12, but a robust, let's say, level at least comparable to the one of '13. So that's for the U.S. In terms of seasonality, I would say that I don't expect a big change of seasonality. I think that we have a slight change in 2013 compared to the previous years. It seems that the operators, mainly in the U.S., have tried to be a little bit more linear in their investments around the year, which explains a little bit a different pattern of, let's say, revenue for us in 2013. Because, as Jean has mentioned, let's say, Q4 was maybe slightly lighter, but when you look at the year on a global basis, we were, let' say, growing by 3%. So meaning that, let's say, of course, for the first time since quite a while, we have, let's say, reignited growth within our business. But let's take for example IP Routing, which was, let's say, negative in Q4. But I guess that you didn't forget that it was above 20% in Q2 and around 18% in Q3. So we have seen something slightly more linear in, let's say, 2013. So maybe a kind of little change of pattern compared to the previous years.


The next question comes from Vincent Maulay from Oddo Securities.

Vincent Maulay - Oddo Securities, Research Division

Two quick questions. The first one on the mix in U.S. When AT&T and Verizon talked about more densification, does it mean better margin or does it mean more small sales are dragging gross margin? And a quick question on Vodafone. Just to assess your confidence to try to grab more exposure to Vodafone, not really on mobile access but on the fixed access and mobile backhaul to benefit from the Spring Project (sic) [Project Spring].

Michel Combes

Can you just repeat the first question, which I have not clearly understood?

Vincent Maulay - Oddo Securities, Research Division

Just when AT&T and Verizon talked about the densification on the mobile side for the base station, does it mean better margin with more upgrade or does it mean more small sales so pressuring gross margin?

Michel Combes

Okay. So you know that on this -- and I know that there is, let's say, comments which are always slightly a bit different within the industry. My -- let's say, my comment has always been the same. I mean I don't see major change in terms of gross margin in those, let's say, rollouts that we see in the U.S. in terms of, let's say, wireless densification, whether it's done with some small -- let's say, some more macro or metro or small cells or whether it's a, let's say, new spectrum or new frequencies, which have to be delivered. Because, on one side, you could, let's say, argue that the extension should deliver slightly better margin, but let's say, of course, customers are also expecting some, let's say, improvement in terms of pricing. So I -- in any case, let's say, I think that the only case is for a slight improvement, but I don't really bet on this one. In terms of Vodafone, so there, it's clear that Vittorio has, let's say, stated his intent to increase the level of investments that he is willing to do in Europe, but not only in Europe. We are, let's say, as other vendors, as you can imagine, in close discussions with Vodafone. And we, of course, expect to get some benefit of Vodafone spend all around the place in the different technologies that Vodafone will leverage on. So -- and I expect beyond Vodafone that, let's say, an additional investment from Vodafone will trigger additional investments from other operators in Europe. But let's say, there the question is more when rather than if.


The next question comes from Kai Korschelt from Deutsche Bank.

Kai Korschelt - Deutsche Bank AG, Research Division

I had a couple, if that's okay. I just wanted to follow up on sort of revenue question before. So I know you don't give guidance, but I'm just wondering how we should think about this. You probably are going to lose EUR 900 million from the disposals. And in Q4, you had, I think, flat year-on-year trend for the sort of core business. So I'm just wondering, would you expect to grow this year so that a EUR 13.5 billion revenue number roughly would be the sort of floor. Or just generally, how should we think about the market overall without, obviously, trying to pin it down on individual quarters? And then my second question was just on -- just a follow-up on your target model. So if I see correctly, then the disposals remove something like EUR 300 million in OpEx potentially. So should we assume that the -- your target OpEx for next year, which I think is EUR 3.9 billion, that, that should come down to something like EUR 3.6 billion?

Michel Combes

So first question -- you are always a little bit the same in terms of questions, meaning that as you can expect, I will not -- and I've told you that I would not give guidance in terms of revenue. I think that we have been very clear on, let's say, a few things, which can help you to think about the way we see things. First, I reiterated that we would reach EUR 7 billion revenue for our Core Networking by 2015, which is, let's say, where we have given target in terms of revenue growth. And I have given you some color on where, let's say, things would kick in, telling you that I was expecting an IP Routing growth similar to the previous years and telling you that, let's say, the IP Transport will turn to positive with, let's say, the support of the 2 NGIN generations, meaning fixed optics, thanks to WDM and submarine cable, thanks to the new projects which have been signed in 2013. So I hope and I guess that it gives you quite, let's say, a clear view of where we stand and where we go. As far as the Access segment is concerned, just to remind you with the fact that I have decided not to commit on any revenue growth because, for me, the name of the game is to increase and improve profitability and to deliver, let's say, strong cash improvements with, let's say, the solitary [ph] EUR 250 million cash delivery by 2015 for Access plus others. So you can expect from us to manage Access plus others, let's say, in that way, meaning profitable growth in order to deliver this target. So that's for one. Second, for disposals, what I have always said is that, of course, EUR 1 billion was -- let's say, would have to be recalculated if, let's say, we do some asset disposals pro rata. So that's what we will do in order to give you, let's say, a clear -- probably new guidance for this EUR 1 billion once those, let's say, asset disposals will be done. But I don't know whether, let's say, Jean, you want to give a little bit more color.

Jean Raby

Yes. And in the meantime, if you want to look at what the P&L will look like for the group as a whole pro forma, I think it's fairly straightforward in the sense that this basically means that if both transactions close, the segment Other disappears because the segment Other included Enterprise and LGS.

Michel Combes

But what I want to be clear on when I say pro rata -- in order for things to be very clear, I am not going to say, "Oh, great, if I just dispose of 2 assets which were generating EUR 300 million OpEx, then, let's say, my EUR 1 billion would be done with -- let's say, with only EUR 700 million." That's not the way it works. What I have always said is that the EUR 1 billion was spread, let's say, around all the assets of the company, so which means that there was a pro rata piece, which was attached to the OpEx of those 2 activities. And so this pro rata piece, which will be, let's say, offloaded. The rest, let's say, will have to be delivered. I don't intend to count on asset disposals in order not to deliver my EUR 1 billion savings, which is my commitment.


The next question comes from Didier Scemama from Bank of America.

Didier Scemama - BofA Merrill Lynch, Research Division

I was just trying to go on the Core Networking division operating margin, which I think was a major surprise at 15%. And I'm just wondering if you could talk a little bit about the gross margin dynamics in IP Transport and IP Platforms, whether OpEx reduction have also taken place in that division. Because sort of back-of-the-envelope calculation implies I'm seeing like a mid-40% gross margin in IP Platform, which is up maybe 15 points year-over-year. So I was just curious if you could maybe talk a little bit about the dynamics there. And then related to that, I think you said this morning in a press conference that you felt you were confident about the sustainability of group gross margins. So is that a comment on full year '14? Or is that something that is more even applicable to the near-term performance of the company?

Michel Combes

So first on your second question. Again, I guess that consistency in the answer and consistency in the execution is what matters. Just reminding you with the fact that gross margin in 2012 for the group was 30%. Even if we had never given guidance on gross margin in 2015, as we presented our operations in 2 segments, I had always said, following different questions from, let's say, some of you, that it was fair to assume that, let's say, the gross margin would move up in the next coming 3 years to reach a level in between 33% and 34%. So that's what I had given as an indication. So when you look at what we have reported in 2013, we reported 32.2%. So an increase of 2.2%, meaning that we are well on track to reach the target that I have mentioned for 2015 in between 33% and 34%. Of course, as you know, there are seasonality in between quarters. So when I say sustainability, I was obviously speaking about the year, let's say, GM that we delivered. And I reiterate my confidence to reach the target that I gave when we presented The Shift Plan, even if it was not a target. But the comment that I made when, let's say, I've presented The Shift Plan is not a target just a comment. Second, let's say, as you have, let's say, mentioned, I guess that all our segments in Core Networking have improved their gross margin year-over-year for different reasons. Of course, it's impacted by, let's say, some cost reductions, it was flagged by Jean earlier on, by also some mix within, let's say, the products that we have within each segments. Interesting to note because that was something that you were looking at for different occasions, is IP Transport. You remember that we come from a very low gross margin in IP Transport, roughly around 17% in Q4 2012. So less than 20%, I would say, in 2012, to give you an indication. We are far from the best in that space. The best are more in, let's say, roughly around 40%. We have increased our margin in 2013. We reported already in Q3 that we had increased it, around 25% and let's say, all in all, meaning terrestrial and optical. And so that is same type of level that we have reached in Q4 '13. So of course, the aim and the turnaround that we are driving in IP Transport is to drive up the gross margin in Transport based again on an improvement of our terrestrial margin, which was higher than this average, which is probably in, let's say, the high-20s now, but which is quite still far from the 40% of some of our competitors, as well as an improvement of our gross margin in Submarine, which will be driven by the renewed activity. For Platforms, we have had an improvement year-on-year of roughly 5 points, which, let's say, we have some cyclicity in Platforms as we have mentioned because you have, let's say, projects and programs which can, let's say, occur in 1 quarter or in another. What is interesting to note in Platforms, it's driven by different factors, which I had already explained in previous calls. IMS, which is a kind of software sale, which means that when you enter in a new customer, in fact, to start with, the margin is lower. But then when you extend the base within this customer as we have a revenue per customer which ticks in, that triggers an improvement in margin. And we have also an improvement of margin which is coming from the disposal of assets that we had in this portfolio within Platforms, which were not as efficient as the segments on which we have decided to refocus ourselves, meaning, as you remember, IMS, Voice over LTE, customer management with Motive, and let's say, our SurePay system, and last but not least, our CloudBand platform.

Didier Scemama - BofA Merrill Lynch, Research Division

And I mean, I'm just wondering. Within IP Platforms, is it -- is there any more pruning that you can do to further enhance the sustainability of those margins?

Michel Combes

There is still a little bit of pruning, which will kick in, in Platform in, let's say, different areas. We have, as you know, decided to exit from BSS, which has not yet completely been pruned up to now, so which will still have some impact. And we have also -- we report also in IP Platform integration services for strategic industries, which will also be reduced over time, as we have decided, as I told you earlier on, to refocus strategic industries on our own products and so less integration of third-party products so -- which will also kick in over time in IP Platform and improve profitability.


The next question comes from Simon Leopold from Raymond James.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

I wanted to see if you could talk a little bit about how your views have evolved since your last quarterly report in terms of the key Core Networking segment. In particular, it sounds like, while still constructive on routing, you're calling for growth faster than the market. It sounds like you're a little bit more cautious about that overall growth rate. But what I'm looking for is really the evolution over the last quarter in terms of how you think about the market opportunities.

Michel Combes

So no change in my perception. And I am even more comforted by what I see from our customers, which is a fast migration to full IP networks, so -- which, of course, sustain growth in routing capabilities in order to be able to do that and to accommodate the traffic explosion. And we see that this is not slowing down. I was looking this morning at some figures. For example, the traffic explosion faced during the Super Bowl in the U.S. compared to last year, which is just 1 event, I guess, it was an 8% -- 800% growth of traffic just on 1 event, so -- which means that, let's say, the traffic explosion is there. And so the trigger for more investments in IP routing is clearly there. So no change in mind. And when you listen to all the customers', let's say, expectations, what they have said, what they have flagged, it's more IP and more cloud. So I guess that the decision that we have taken 6 or 7 months ago to refocus the company on IP and cloud and ultra-broadband access is even more accurate today, first. Second, I think that as I have, let's say, clearly explained when I explained the IP Routing segment for, let's say, 3 years in a row, we have increased our revenue by more than 10% year-over-year even if the base is increasing. I've tried to explain to you the waves, let's say, of, let's say, growth, meaning that, in the past, it has been mainly triggered by the LTE deployment and the mobile backhaul investments, which have clearly allowed us to build this #2 position in edge routing. We see now new streams of growth around mobile packet core, where we, let's say, took a #2 position in the marketplace, with, let's say, the great success that we have had in the U.S. and in China. We see, let's say, growth kicking in, in core routing, which is a market in which we were not 1 year ago, so -- that we are entering in with, let's say, products which is probably considered as the best product in place for the time being. And it's obvious that for a customer, let's say, there is some gains to have the same equipments for edge and core in terms of total cost of ownership. We have our new venture, Nuage, which is opening for us a brand-new opportunity in the cloud. And so I already reported to you those 4 commercial successes. And last but not least, the diversification of customer base. And when you listen to some of our competitors, it's clear that they derive part of their growth from non-service providers, namely cable operators, web scale players, larger -- extra large corporates in that segments, that we are just starting to enter. So that, for me, are the key components, which will underpin our ability to continue growing our Core Networking segment in the next coming years.


The next question comes from Sébastien Sztabowicz from Kepler Cheuvreux,.

Sébastien Sztabowicz - Kepler Cheuvreux, Research Division

One question on cost savings. Because you already achieved the EUR 360 million of savings in 2013 and you look fairly well on track to reach EUR 1 billion objective for next year, how should we think about 2014? Should we expect something pretty linear to reach EUR 1 billion target for 2015?

Michel Combes

First, I have not said EUR 1 billion by end of 2014. Let's be clear. The plan is EUR 1 billion by end of 2015. True that, let's say, we have delivered a strong first phase and even more if you consider that Shift was really launched back in June. But nevertheless, I guess that I have always said that in this type of exercise, the pattern is always the same, first phase, slightly bigger. Usually, you speak about low-hanging fruits. In the case of Alcatel-Lucent, that's a little bit difficult to say low-hanging fruits because this company has already been restructured in the past. But that's true that with Philippe Guillemot and myself coming with a, let's say, different vision we were able to implement fast and quick some new things in order to reduce the cost base. And you have seen that it was also mainly based on, let's say, reduction of employment within the company. Then we should have a second phase, which will be slightly lower in terms of cost reduction, as we will have to reinvest in order to be able to reconfigure our processes. When you want to do outsourcing or offshoring, you first have to invest in parallel before you can switch off your activity and completely turn it to an outsourcing or offshoring. So that will have a slight -- an impact in 2014. And then we will have the full benefit in 2015. So that's the pattern I have always said, big 1/3, small 1/3, big 1/3. And so that's exactly where we are and let's say, completely committed and very comfortable on the EUR 1 billion.

Sébastien Sztabowicz - Kepler Cheuvreux, Research Division

One last question, if I may. On the Verizon deal in Optics, some are speculating that you may have gained this deal at the expense of prices. What is your answer there?

Michel Combes

I guess that you will see the answer in our accounts. What I have said since the beginning, what we are shooting for is profitable growth. So don't expect from us to deviate from this road. I guess that it happens that we had the right product with the right features for Verizon. And so this win has been done and based on the quality of the product and also the quality of the relations that we have with Verizon. I am very proud of this win, which will pave the way for the turnaround of Optics, as we have always discussed altogether in the past few quarters.


The last question comes from Gareth Jenkins from UBS.

Gareth Jenkins - UBS Investment Bank, Research Division

Just a couple of quick ones, if I could. Firstly, I wondered if there's any sense that there may be some other deals like Qualcomm, whether on the technology side or with industrial partners that you can seek going forward. And secondly, I just wondered in regard to the China ramp, you said the impact is still to be felt. I just wondered whether the margins coming through from China will be equivalent to some of the margins that you've seen on the U.S. build-out on LTE.

Michel Combes

So 2 questions. In terms of technology, as you know and as I have always flagged and said, innovation is absolutely key and critical for companies such as Alcatel-Lucent in order to regain even more traction. So we came with this first partnership, and I have always said that, let's say, innovation should be done, of course, on our own but also with partners. The first one was Qualcomm, which came quite early and quickly due to, let's say, specific relations with Qualcomm. We are working, as you can imagine and as I have said, on additional technology partnerships, and so that we will disclose in due course. But expect that some others are in the pipe. So that's for your first question. For your second, you know that the level of, let's say, pricing in China is lower than elsewhere in the world so -- which means that the margins which are coming from China are obviously lower -- the gross margin which are coming from China are obviously lower, partially compensated by the rest of the cost structure when you look at the EBIT level. But let's say, it's clear that for all vendors, China has a dilutive effect on the margin of our Wireless business, at least to start with, as we are still in a position to build footprint. Once, let's say, you have positioned yourself in the footprint, then, let's say, we would be able, of course, let's say, to re-improve EBITDA margin.

So I guess that -- it was the last question, in fact, last 2 questions. I just would like to thank all of you, let's say, for having listened to Jean and myself and for your questions. I hope we gave you all the clarifications that you were expecting. Thanks, and have a good afternoon. Bye-bye.

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