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Alcatel-Lucent (NYSE:ALU)

Q4 2010 Earnings Conference Call

February 10, 2011 07:00 AM ET

Executives

Ben Verwaayen – CEO

Paul Tufano – EVP and CFO

Peter Benedict – VP, IR

Analysts

Sebastien Sztabowicz – Kepler

Keith Mallinson – WiseHarbor

Tim Boddy – Goldman Sachs

Vincent Maulay – Oddo Securities

Andrew Griffin – Bank of America/Merrill Lynch

Michael Howard – Infonetics Research

Alexander Peterc – Exane BNP Paribas

Richard Kramer – Arete Research

Eric Beaudet – Natixis Securities

Kai Korschelt – Deutsche Bank

Zahid Hussein – Citigroup

Odon de Laporte – Cheuvreux

Simon Leopold – Morgan Keegan

Gareth Jenkins – UBS

Ben Verwaayen

We want to be strict on time, so we have 10 seconds to go. So good morning, good afternoon, good evening depending where you are. Thank you for joining us on the Q4 results call.

We’ll have Paul joining me in a second on the details of the numbers but let me start by giving you the chance of looking at this wonderful chart, read it at your leisure, people work very hard on it and it is wonderful prose that is been conducted here. And so we are happy. We are absolutely happy with the results as we can produce them today for you. And I think that it’s crystal clear that we have a momentum, we have a clear momentum so to say in the markets, and we have a clear momentum with the company. And I think the Q4 performance builds on what happened in the quarters before. There is a logic in it. And what I am trying to do here today is to tell you the story of where we are on our journey. It is a three year journey and we’re at the end of the second year.

It is a three year, but it is one with clear momentum and I’m very happy to have the ability to explain to you how the market works and how we work into the market and where we are. It has been a remarkable week for Alcatel-Lucent. Only a week ago, we were able to communicate with the market the progress we made on Green Touch, the initiative that we have with other players in the industry to dramatically reduce the energy footprint of networks in the view in light of expansion of networks. We’re going to add a billion people or so in the coming four or five years, and clearly the energy consumption that we have today is unsustainable. It’s unsustainable for operators if they look just to the bottom line, and it’s unsustainable if you want to go to areas, the rural areas that we can’t reach today.

And a week today, (inaudible) was running Green Touch was able to give a very clear view of where we are with the addition of many, many new partners from the industry, competitors of ours, customers, universities and they are something growing there. And it is a method of going to innovation. It’s a matter to address innovation. It’s not everybody under own silo. It’s doing it together. And that exactly was the same message when we produced on Monday, I think an astonishing new model going forward in mobile networks where we talked about Light Radio. Again not something we did an isolation, it’s based on the innovation of Bell Labs but it reaches out immediately in a kind of co-creation to partners like Freescale and HP and to customers, to co-create with us, something that is needed in the market because the market is developing so rapidly.

So there is something in the market and something in the company that comes together and that produces results. Results that are hopefully continuing on a financial edge as well. So what’s happening in the market? Well we know about the explosion in traffic, just to get a feel we expect that at the end of 2012, we will have more than a 0.5 billion smartphones in the world, more than 0.5 billion at the end of 2012, which is only what is it, 23 months away. So something is happening there, I mean the fact that two billion views per day on YouTube, something is happening there. The way that people integrate communications in their life is very different, and it is moving very, very fast. It is not just looking at stuff, it’s communicating differently, it’s becoming a lifestyle and it’s entering not just the private life of people also the way they work together with others. And somewhat of that is enormous amount of traffic going around of a very different nature than what we have seen only a few years ago. And that has an impact on how to deal with the business models for our customers. Second, it’s clear that we go rural. The world has chosen also to go rural with broadband. If you look to the numbers that are added in Q4 of wireless new customers in two markets, let’s say China and India, 60 million, one quarter in China, 30 million in India. So something is happening also in the way that the market is expanding. And if you look the plans that not just President Obama said when he had in the state of US but if you look to Australia, if you look to Europe, the aspiration to go out and to connect to the world is tremendous and it has an implication where the market is going. And how are we doing?

Well we set out and we shared that with you at the end of 2008 and in the beginning of 2009, a strategy around what we call High Level Network which is basically in convergence of network, give the ability to customers to choose between screens. A big screen, a small screen or a very small screen you can randomly go through it because the network is converging. And we built products around it. If you are an engineer in Alcatel-Lucent and you cannot justify your investment that it has a link in what we do in what we call HLN or application enablement, you’re in trouble. The likelihood that Philippe Keryer will say yes to your investment goes down rapidly, if it doesn’t fit in there.

And you can see that there is traction in the market as well. We grew in quarter 72% year-over-year, the relevant of that portfolio. And it is now accounting for almost 46% of everything we do. That’s cool, 72%. The good news Paul will tell you is that the other part also grew 10%. But I think it is important that we made bets as an organization. We translate our vision into reality and the markets set resounding yes to what we had to offer. So this works, yes. Here you see some of the wins in the quarter, you can see it at your leisure and it’s not important to look to each and every of those boxes. But important is that you can see this HLN strategy in the middle, and that each of those strategies is occupied by customers who can make a difference by the converge nature of what we have to offer. Our optical is not just optical, it’s optical than IP. Our IP is not just IP, its IP throughout.

Our wireless is working together with our IP. So the logic in the portfolio, the click and play so to say from a logical point of view, is proven a massive positive where we are as an organization. We grew in this quarter all our segments of network. We grew every single of our regions. So let’s go through the trend here. The trend is important because the trend is a trend that you will see in every slide that I am going to show you is a trend upwards. So here is the IP story. And we have taken constant currency because Frank tells me that if you want to have a trend you need to go in constant currency. I love to have the actual currency because the number is higher, but he tells me okay, we’ll take the constant currency. Fine, since the numbers are so great whatever number you take its fine. So it’s 49%.

In my language it would have been 59%. But there is 49% growth. And the important here is this. If you analyze this IP business of ours, which was a tiny acquisition only six, seven years ago. It’s now a 2 billion euro business and growing at 49%. And it’s growing in every single region. And every single region that we have, the growth starts with five or higher. So this is tremendous achievement from the team that has not just looked to creating a box, but has looked to create an ecosystem. So the other technologies are linked into it. So you can truly talk about IP transformation and the business that we do, if you look to for example the mobile backhaul wins that we have truly underlined and underpins effect that we as consumers are choosing to get any service on any screen.

We have decided that whether it’s a big screen or a small screen, we chose and we want to have all the video capabilities wherever we are. Now, here is the optical. The optical story is somewhat more complex, because if you see 1% which is in actual rate 7%, it still is up, okay. First of all you see the trend. Optical this year had a problem. The first problem was that we were hit harsh [ph] in this particular area on the component shortage given the fact that by nature this product is more or less tailor made especially from markets and in some regions.

First of all, we’re working ourselves out of this tailor made every single customer was in single specification, and second the whole area of terrestrial optical, it’s doing pretty well. In this quarter, it grew 14%. The thing that is in this number as well is the submarine business which is a great business and we’re very happy with the order traction that we got in the quarter, but it’s a somewhat lumpy business. So in this particular quarter, the submarine was down 30%. If it’s down 30% you still produce these numbers, it tells you something about what we do, where we make a difference in the new stuff. WDM being the new stuff, it grew 50%. So the story underneath is it fits perfectly in the transformation story of networks and network capabilities.

Now wireless, I keep reading that we have a problem in wireless and I keep looking to Philippe and say okay, let’s look to the wireless business holistically. First of all let me start with the good news. 20 new contracts in Femto and small cells. We have a really traction on the small side of the networks, but at the same time every single of our technologies and you know that we are in all is growing. GSM grew 9%, CDMA grew 19%, Wideband CDMA into 40s especially in Asia Pacific, in China, in Korea. Overall this business is really, really doing very well. 34% growth in the quarter and the first quarter that we have substantial LTE revenue, more than a 100 million euros.

So I think that we are really was momentum in the wireless business. This is a business that is truly important if you take convergence towards logical conclusion because it means it doesn’t matter whether it’s fixed or mobile, everything is mobile in the hand of the consumer and everything is fixed for as much as it makes logic sense for the networks that you build. Wireline. So the wireline story is this. The old technologies are going down rapidly, and we still have some of that but the new technologies like the PON technologies has grown substantially, PON grew 55% in quarter.

So the whole of the businesses grew 15%. And you hear everywhere this notion of getting the world connected, building the infrastructure, the physical infrastructure to make sure that you get broadband high speed connections everywhere. We haven’t seen the start of that yet and this business already grown 15%. So if you look to the announcement not just in the US, not just on Australia, if you look to the ambition in Europe, you look to other places, I think this is a business that has a lot of legs in future.

Now as I said, this is the reports that we can give to you, investments on the portfolio and resulting business that we have around our High Leverage Network. This week we announced something that is really, really important. We announced Light Radio. Three things why it is important. First of all, it is absolutely relevant. It talks about green in the nature of the business, it talks about inclusiveness because it gives capabilities where today are none and it talks about invisible because there is a problem with the landscaping of our mobile networks.

This technology is a Bell Labs invention, but one of the things that you may have noticed if you have a good eyesight and you are as young as Stephen Carter and you can read this, here it says, At the speed of ideas. And it has two elements to it. The first is the word idea. Bell Labs of course is the mother of invention for our industry and that has been that way for a long time. What was lacking a bit was our ability to translate all those great ideas with the necessary speed into products to make a difference in the market. And if you look to this product, it is really a good example of this tagline in which we will produce to the world to give our message, Alcatel-Lucent, At the speed of ideas.

This is a great invention based on breakthroughs in the antenna technology and the algorithm that are around there in Bell Labs, but better than that it’s taken to the product guys in time to reach out to others like Freescale and HP, and our key customers to develop this into something that is meaningful. It may be very disruptive but it’s very meaningful and it’s addressing the right issues that the industry needs to get addressed. And we have now a pace in which every six months we can give you an update on the product family development. So that is very different than what you have seen in the past.

So if you look to applications, that is a business that also was in desperate need of a rebalancing. Too much of the old stuff, not enough of the new stuff. And you can see that we have turned the quarter there as well. If you look to what we’d done in enterprise business, our data business has grown 14%. Our voice business is down 7% as you would expect. And if you look to the network business, there where you talk about new applications, truly application enabling like remote customer service was Motive or you talk about the fact of digital media rights and digital media management, you can see that we grew very, very substantially in those part of this business. And all in all, you can see the trends also going up here.

Services. Services is an interesting story, we grew 10% in quarter, and if you look to the trend its 3%. The 3% growth is a reflection of two messages. The first message is the new stuff that fits with our application enablement and HLN strategy like what we do in network system integrations is growing dramatically, 23%. If you look to the old stuff, the more classical stuff, that’s going down. And if you then see that in network, managed networks, we’re doing pretty well. And you can see that the balance that we have to bring through our product portfolio exactly the same process. We have to go in our service portfolio and we are doing it as we speak.

I think it is very encouraging to see that there is logic in our portfolio that translates into logic to what our customer buy from us. A new market is the market that we call strategic industries. And this is the market that is for us approximately a billion plus. So it’s not very small, we don’t spot very small. And basically this is the story that you could also have also for oil. The beginning oil you could get in a bottle so you can drink it or you get in the barrel so you can burn it, that was it. And then somebody found out that you can use it as a kind of interesting product to make plastic out and medicines out of it and it becomes an ingredient for other industries, the same here for telecommunications.

If you run today, a smart grid you need information on all part of your electricity network. You need probably a network as complex and as integrated as a telecom operator. If you run a transport system when it’s above ground or underground you need the same type of information. If you run a modern hospital, you might be pleased that you need exactly the same IT information throughout your organization in order to make it the modern healthcare that you’d like to make out of it. So all of a sudden, what we have to offer to our classical customers becomes very, very relevant for a whole new breed of customers. What you need to do is to make choices, where to go and where not to go, make sure that you have the industry logic behind it, and then go and sell. And that’s what we do and that’s what you can see in the future from us doing more and more.

So all of our segments grew and all of our regions grew. The story in Q4 was a total of 22.6% growth. It’s interesting if you look it from a regional perspective. The US, you knew that we would do well, 45% not a bad number, but South America, Latin America grew more than 50%. You see it here under the rest of the world. If I look to Asia, Asia had a difficult start of year because of China and the reasons there. If you look to the number now, in actual terms 21% and China being more than 50%. And if you look to Europe, 8% growth is not bad for a region that for the first couple of quarters had really difficulty find the growth spots.

So we are very pleased with the balance that we have from a geographical point of view and we’re extremely pleased to see that all of them contribute to the growth. Now we have market traction, we have the right products to develop further but the art of course is to make that top line and make sure that you have from operation point of view the instruments to translate it in a good bottom line and a good cash flow position. Paul would go a little bit deeper in this but I think that it is good to see that we had in Q4 the gross margin that we were aiming for, that we have made a structural improvements in our cost structure that we want it. We lowered our breakeven point by another billion in 2010 and we strengthened our balance sheet. The fact that we had such a positive cash flow position in Q4 is truly encouraging.

You see where we were with the component issue, the shortages, that has really has given some headaches in the first two or three quarters of the year. It has improved and you can immediately see the effect of that and we expect that we are back to a kind of normal position is somewhat longer lead times but still a normal position for 2011 which is a positive. So here were are. With clear momentum we feel that we’ll grow in 2011, faster than the market. We think that the market will be with single-digits. We’ll grow faster. And we aim to reach an adjusted operating margin above 5%. I think these are clear indications of an organization that’s on a journey. We’re on the move. It’s a three year journey, so we are not done. We have to do the third year. There is a lot of work that we have to do, but we are confident that we have the capability and that we have the motivation and the support of the market to go and deliver that. And with that in mind and at the speed of ideas, Paul, it’s yours.

Paul Tufano

Thank you Ben. So what I’ll do today is give me the color on the numbers, I start with the P&L. Obviously it was a very strong quarter for the company, record quarter in terms of operating profit, adjusted since the merger and quite frankly a very strong end to the year. If you look at our overall bottom line performance in the fourth quarter, we delivered 8.1 points of operating margin adjusted that resulted in 1.8 points for the full-year. That was based on revenue growth at constant currency of about 15% year-on-year and about 22% quarter-on-quarter. So very good growth. But most important thing is the fact that the gross margins returned back to 36% – 36.2%. That strength almost 240 basis points of gross margin improvement from previous quarter.

It was really driven by the high volume level and therefore the ability to grow more fixed cost as well as the fact that we had good product in geographic mix. If you look at the full-year, we’re able to improve our overall growth margins by over a 100 basis points year-on-year, majority of that came from or half of it came from our cost and expense reduction activities, another half came from volume and product mix. So I think we’re demonstrating our ability to continue to expand gross margins, we expect to do that as we move in 2011.

If you look at our expenses, there is a lot of impact on currency in these numbers. When I adjust numbers for currency, the overall OpEx in the fourth quarter increased about 7% quarter-on-quarter. That 7% primarily was a result of two things, A, we continued to increase our investments slightly in some of our newer product areas, that Ben alluded to, to support the High Leverage Network as well as the fact that given the strength of the sales and order bookings in the fourth quarter we had more sales compensation expense. All right, if you look at the full-year, adjusting for currency you see that OpEx is down 1% but the mix is very different. SG&A is down about 4% and the R&D is up too, again because of that investment in R&D.

We did reduce our overall cost and expense structure by 300 million euros before variable comp, I’ll get into more detail about that later in the presentation. If we turn to the breakdown by segment of operating margins, I think Ben highlighted most of these points. I’ll just articulate just a couple. Obviously there was huge strength in networks year-on-year and that was supported across the board. I think it’s interesting to note that GSM which has traditionally been declining and been a drag in our performance, actually improved 5% year-over-year and we expect GSM to have some continued strength as we move into 2011.

CDMA full-year was about flat year-on-year, and that had traditionally been a decline. And overall our WCDMA business year-on-year for the full-year increased close to 40%. So I think we’ve got some pretty good legs there. For the second time I won’t go through the rest of the detail. If we move to operating income, obviously very strong fourth quarter with almost 400 million euros of operating income. If I look at this chart probably the most compelling number is the dramatic change year-on-year in networks. So networks year-on-year swung almost 500 million euros in operating profit, tremendously influenced of two things, the growth of IPD, but more importantly the impact of higher volume and mix on the wireless business which was majority of that swing. And so I think that’s a real testament to the strength of the product portfolio.

If you look at some of our other businesses especially applications, you see that there is a 108 million euro swing from the negative year-on-year. A lot of that is in, I’m sorry, that’s services, a lot of that, half of that’s in maintenance, the trend through the course of the past year has been for customers to do more of their own maintenance and so we’ve seen not only a reduction in overall maintenance revenue growth but also some pressure on price. Another half was quite frankly in some of our other services businesses while we’ve made good progress in our managed outsourcing businesses, we still have more to do in expanding the margins.

In applications is swing to 55 million euro, a lot of that is due to legacy applications where we are no longer investing as much while we’re getting ready to sell the newer applications going forward. On a revenue basis, I guess what the beauty of Alcatel-Lucent is the fact that we have equal distribution of revenue around the world. So our bets are equally placed around the tables. We’re able to grow with market trends quite handsomely. Ben indicated the overall numbers by geography, I’ll just highlight here in terms of growth, North America obviously grew very strong both on a quarter-on-quarter and year-on-year. It’s interesting to note in the quarter at constant currency we grew our business in North America by 18% and that’s of a very high third quarter. So that’s testing of the team there and more importantly the need for additional capacity on those networks.

Europe, both Eastern Europe and Western Europe grew in the fourth quarter. CALA had a fantastic quarter as Ben indicated. So we see positive traction that we hope will continue throughout 2011 in all the geographies. If we turn to the balance sheet, there is nothing significant on the balance sheet, majority of the changes quarter-on-quarter were attributable to FX or changes in pension as you’ll see in the subsequent charts we have reduced our underfunded status of the pension. So you’ll see a fair amount of change between pension liability and shareholder equity has that now improved to shareholder equity.

Real issues on working capital, I’ll spend some minutes talking about that. Obviously this has been an area we’ve been focusing for the past year given the component situation in the industry, in order to drive our top line revenue and meet customer demands, we increased our inventory over where it was at the end of 2009. And so as the course of the first three quarters of this year, inventory has been net consumer of cap. If we look at the fourth quarter, we began to reduce that number. We’ve taken inventory down at a constant currency affected rate of over 300 million euros. And we expect that trend to continue into 2011. Now because of the strength of the fourth quarter and in some of the backend loaded nature of ourselves, we increased our receivables by about 250 million euros.

So while the net cash effect from balance sheet was only minimal this quarter, we should see that improve as we move into the first half of next year especially in the first quarter as we collect those receivables. With regard to receivables, as you know we’ve been very focused on reducing overdues. At the end of the fourth quarter, we were able to take another 11% reduction in those overdue numbers, that’s the lowest numbers that company has had I think since the beginning of the merger. And there is still more opportunity in my opinion.

Turning to the cash flow statement in the quarter, we generated 319 million euros of cash, 319 million euros of free cash flow. That was primarily driven by the strong earnings performance. As you can see from the chart, operating working capital was a slight positive of 2 million euros, but I think we had good control on the other expense line items. If you look at the restructuring charge, it was 91 million euros for the quarter. For the full-year, restructuring was 377 million euros. So below the 400 million euros we’ve said in our third quarter call and significant below the guidance we gave you at the beginning of year 600 million euros.

Our capital expenditures were about 230 million euros for the quarter getting to about 692 million euros for the year, that’s flat year-on-year, in line with guidance we gave you. We’ll look to try and try and take capital expenditures down in 2011. During the quarter, we had two asset sales. We sold our vacuum business which closed at the end of the year and we divested our investment in 2Wire, a set-top box manufacturer. Both of those divestitures brought approximately 260 million euros of cash into company in the fourth quarter, and you can see that as part of our net cash position. And obviously as you all know we increased, we raised some debt in December, we did a 500 million euro high yield offering and we did some structured notes throughout the course of the quarter.

Again in the quarter, we ended with 5.7 billion euros of cash in marketable securities. On January 3rd we repaid 818 million euros on the OCEANE that was due. So the net cash position right after that disposition was 4.7 billion – 4.9 billion euros. The revolving credit facility is un-drawn, remember its 1.4 billion euros and all covenants have been met. If we turn to the pensions, significant improvement in the underfunded status of the pension, I’ll remind you this is an accounting presentation of the pensions. The underfunded status reduced by about 900 million euros quarter-on-quarter, that was primarily due to the improvement in the discount rate. Discount rate improved 50 basis points.

Now the most important question we do get is, what is the status of the US pensions, especially the management plan. For those of you who perhaps understand the pension accounting is fully as others. Funding requirements in the US are dictated by the (inaudible) policies for the federal government. And you calculate funding requirements once a year based on valuations in December 31. We are highly confident that there will be no funding requirement in any US pension through 2012. There is two pieces of information that’s still yet to be compiled before we can say that 100%, one is the census data which takes in the course of first two quarters and the other is the evaluation of our private equity and real estate portfolio.

But we sit here today, we believe that it is highly probable that there will be no funding requirement through 2012. I also mentioned that during the course of the quarter in order to give us more flexibility in the pensions we did transfer approximately 6,200 employees from the occupational plan to the management plan. These were employees that were not represented by the Unions but were previously categorized in those plans. That will move approximately 800 million euros of assets and approximately 500 million euros liabilities, therefore giving an increase to the funded status of the management pension plan, further giving us more headroom in 2011.

As we now turn to talk about 2011 and the guidance, we very much take some time to talk about the actions we’ve taken on our cost space, because over the course of the last two years, we’ve taken out of the company approximately 860 million euros of fixed cost and expense. And as we’ve talked about with a number of you before, the way we manage cost and expenses of the company is look at the total cost of all cost from fixed costs that are in gross margin, for service commissioning, for planning for whatever, to all the R&D expenses, to all the SG&A expenses and all the infrastructure expenses. IS and IT and real estate.

In 2009, we were able to take about 550 million euros out of that base which is little over 7 billion euros. And the majority of that came from was evenly split between our fixed operations cost, our R&D expenses and our SG&A. In 2010 that 300 million euros that we’re showing 306 million euros has 50 million euros in growth in it for R&D. When we reduced the R&D expenditures in 2009, it was a result of the pruning of the product roadmap, where we had reduced a lot of legacy products and we’re investing in the new products. In early 2010, we further increased our investments in some of those new products especially in the areas of IPD and optics and application enablement and in leading edge technology and transport. That resulting in a 15 million euros year-on-year increase in R&D which is showing up in the number you’re seeing in some of the innovations that Ben has portrayed.

So consequently we took out 356 million euros to offset part of that 50 million euros. The majority of that came out of SG&A, about 50% of that. We continued to take out fixed cost and expense of about 27% and the rest was out of infrastructure primarily real estate. As we move into 2011, we will take out another 300 million euros to 400 million euros of fixed cost and expense. That fixed cost and expense will primarily come from SG&A, as well as infrastructure primarily real estate, with some out of fixed operation cost. Our engineering expense, we left relatively flat.

Now where is this reduction coming from? So in our SG&A, as we’ve talked about before, we have a significant move upfront to simplify the organizations within the company. We’re very complex organization. We spend a lot of time moving data internally, moving product internally. We’ve got a big effort to simplify the company to increase speed, increase agility. That would drive the majority of this savings. In our real estate portfolio, we have significant opportunities to reduce our real estate portfolio. I’ll just give out one number, it’s not a happy number to give out, but as of today we have over 600 sites in the company to find small offices, big offices and we have an aggressive plan underway to reduce that site portfolio that will leave to that reduction.

In our fixed operations cost, while we’ve made good progress over the last two years of reducing it, there is still opportunities especially as it relates to supply chain simplification, logistic simplification as well as the impacts of having too much inventory. So that’s how we’re going to get to that 300 million to 400 million euros and while it’s never easy, we have significant opportunity that can be captured in the upcoming year or in this year.

The result of that is now we believe we have a strong path to the 5%. Part of it will be based on growth. As we said before, we expect to grow equal to but not greater than the industry. When we do that growth, it will be targeted growth in those products that provide value to our customers and they provide value in terms of their currency in terms of new technology that are cost performance for us. We will continue to focus on reducing the cost of products and deliver. Both redesign our products as well as the simplification of a lot of our delivery infrastructure.

And with the elimination of some of the component constrains in the industry, and hopefully that we can get better purchase price variance on component negotiation. As it relates to the spending fronts, I think I gave you the outline of we’re going to get that 300 million euros to 400 million euros. So based on that we are committing to the outlook we talked about earlier and just to close on that point, given the traction we have in the marketplace, given the product and solutions portfolio and the significance and relevance that now has to our customers, given our improving execution and opportunity to further reduce costs and expense, we are committing as guidance to – of Alcatel-Lucent grow greater than and frequent to the industry and to achieve adjusted operating margins of 5% or better.

So with that we’ll now take questions.

Question-And-Answer Session

Peter Benedict

Thank you. If the operator could give instructions on how to ask a question on the bridge please.

Operator

(Operator Instructions).

Peter Benedict

We’ll take the first question from the room.

Sebastien Sztabowicz – Kepler

Yes, hello everyone Sebastien Sztabowicz from Kepler in Paris. You already extracted more than 200 million euros of working capital in Q4. What could be the cash inflow in 2011, please?

Paul Tufano

All right. So the question is what is the free cash guidance for 2011? We will be positive free cash flow. Rather than I can put bracket positive free cash flow.

Peter Benedict

We’ll take another question from the room.

Keith Mallinson – WiseHarbor

Keith Mallinson, WiseHarbor. To what extent is this upturn a market recovery and what extent is it in Alcatel-Lucent recovery. In another words, how do you see your market shares doing in various markets?

Ben Verwaayen

Well if you grow 22%, you probably will gain market share. And I think that a beauty of where we are right now is that it’s not just us, it’s not just the market, it’s both. But you have to be in a market with the right answers for the requirements that the market has. So it’s not just the tie that everything goes up. It goes up very specifically. It’s not that the market grows on every product and every product that you have available. If you have the right products that address the issue for our customers, you grow. And you grow as we’ve demonstrated big time. Overall, we think that the market in 2011 will grow mid-single-digits. And we have as you just heard as Paul and I said, we will do better than that, because we think that we are in the sweet spots where things happening. So it is surely Alcatel-Lucent but it is also the market.

Peter Benedict

We’ll take a question from bridge please.

Operator

We have a question from Tim Boddy of Goldman Sachs. Please go ahead with your question.

Tim Boddy – Goldman Sachs

Yes, thanks for taking the question, couple of detailed ones, one on the pension. You mentioned you won’t expecting to make any special contributions. What would be the ongoing cash contribution to the pension this year? Would it be similar to last year around 200 million euros? And then if you could comment on the balance sheet, you’re running a very inefficient balance sheet with a huge amount of growth, there is some gross cash. What prospect is that to look to normalize that? And then very finally if you could say anything about your goals for long-term margins, you’ve taken away the 9% from your aspiration to say 5% plus. Should we still think about 5% to 9% is the right kind of mid 10 business model for the company? Thank you.

Ben Verwaayen

So shall I take the last one and you take the rest.

Paul Tufano

Okay.

Ben Verwaayen

We have given you guidance and we say five or better. So that’s the guidance. If we had anything else in mind, we have said something else. So we have clearly in mind to guide you and it will be five or better. And I think that if you’ve seen the performance that we have during the year and you’ve seen the improvements that we have made quarter-by-quarter-by-quarter, you will see the logic of what we tried to communicate to the markets. It’s clearly commitment to do 5% or better.

Paul Tufano

So with regards to question on pensions, you can assume that next year the pension funding will be equal to about this year which is about 220 million euros. So I think that will be a flat year-on-year. Obviously, we’d like to repay the debt, but first thing we have to do is get free cash flow positive. So first task is get free cash flow positive and then we’ll look at our capital structure after that.

Tim Boddy – Goldman Sachs

Okay, then just follow-on briefly you’re saying Ben 5% plus is the long-term objective now for the company.

Ben Verwaayen

No, also.

Tim Boddy – Goldman Sachs

In 2011.

Ben Verwaayen

Sorry, we had talked about 2011.

Tim Boddy – Goldman Sachs

Okay.

Ben Verwaayen

I don’t think that I have said anything about 2012 or later, that would be I think highly inappropriate. We had a three year journey, remember. So in the first year it was to get the house in order and you’ve seen that what we did was cutting cost basically and getting our design of a strategy in place very finest strategy, wish your customer done that, second year we have delivered that you could see the more the year when buy the better we were able to bring the new products to market and they find attraction. 2011 is the year that we have to finalize our journey to become a normal company. Normality is never the ultimate goal, it’s not the great complement to say that somebody you’re normal. That’s just a kind of minimalistic approach. So we will want to be better than normal, but we have set on a journey, is the journey to 2011 and 5% plus is what we say for 2011.

Tim Boddy – Goldman Sachs

Okay.

Ben Verwaayen

We’ll address 2012 four quarters from now.

Tim Boddy – Goldman Sachs

That’s very clear. Thank you.

Peter Benedict

Next question in the room please.

Vincent Maulay – Oddo Securities

Vincent Maulay from Oddo. So the first question is maybe if you can give us some color on the how Alcatel-Lucent is now viewed considered by mobile operators, and to assess how is the opportunity to break into a tier one account in Europe on the back of LTE and into the Light Radio. And the second question is you intent to reduce the number of sites, and to assess your early way with Unions to be able to reduce the number of sites?

Ben Verwaayen

So let me start with the second question, because the number of sites is not a matter of reducing headcount. The number of sites is doing what we said. We are sometimes very inefficient how we organize because it was the reflection of the independent states was in the company of the past. So every single silo had their own locations and sometimes on the other side of the road. So there is a lot of things we can do to make it a more logical thing and that’s what I think is our number one. And the number two is we are a global company, I mean if you see the benefits of all the numbers, it’s the global nature of the company which is truly helpful, and that means that you need to have a strategy. You may need to have also the ability to work together in teams around the globe. So we are carefully designing a real estate strategy to fit the needs from Philippe and the development teams and the local teams and at the same time get a cost structure that is much more lean and mean, given the fact from where we came from. So that’s the part of the strategy.

Vincent Maulay – Oddo Securities

Okay.

Ben Verwaayen

The mobile network. Well there are two things to say, first of all the mobile networks is more than the base stations, and I think we have said that many times. If I look to the mobile operators in Europe, the big operators we have a great relationships with most of them. And we are in many different products. If you mean going into the macro networks and the base stations area of those networks, I think that the disruptive technology that is represented by LTE and represented by what we now call Light Radio are great opportunities going forward, in the meantime, if you look to our position in the small cells, in the backhaul, in our service capabilities, we have great relationships.

You don’t grow your business 30% plus in wireless unless you have that relationship that developing relationship. So I am pretty optimistic about our position in the wireless market. I’m pretty sure that we will gain market share again this quarter, as we did in Q3.

Peter Benedict

Next question from the bridge please.

Operator

We have a question from Andrew Griffin of Bank of America/Merrill Lynch. Please go ahead.

Andrew Griffin – Bank of America/Merrill Lynch

Hi there, thanks very much. Just a question on the enterprise business, how does that fit into your High Leverage Network plan? There seems to be some product overlap potentially with your IP division and your HP alliance, but equally your predecessors always said it was subscales. So I just wondered what the plan is for this business, and I guess I am particularly talking about the ex Genesys part of enterprise?

Ben Verwaayen

So in the ex Genesys part of enterprise you see that we grew very, very aggressively in our data business. There is a transformation going on without share of a doubt, the pure voice market is shrinking. And there is a drive for the data business. which fits because you get the on premises verses the LAN [ph] solutions and the capabilities to work together from an enterprise markets that’s truly important and we were pointing out our strategic industries, and a lot of these solutions that we talk about in enterprise have great applicability in our strategic industries. So I am absolutely focused to make the same type of generational change in the product portfolio and enterprise that we have got in the rest of the organization, hanging on to what was is not a great strategy.

Andrew Griffin – Bank of America/Merrill Lynch

And what are the data products please?

Ben Verwaayen

So the data products that we have are data products in the LAN environment, we have driving [ph] capabilities, we have data switches, so there are a lot of those products that you would – which you could compare with other players in the market. We compete on that level with many of the other players.

Paul Tufano

OmniSwitch switch which was announced about quarter and a half ago we’re seeing tremendous success.

Peter Benedict

Next question from the room please.

Michael Howard – Infonetics Research

Hello, Michael Howard, Infonetics Research. I have a question about China. China is good news and bad news. Good news, you showed great growth sales in China, the bad news they have a nice stock pile of cash from balance of payments, China government via the China banks support, the funding of sales to Huawei and ZTE. How do you see – what’s your strategy versus the China vendors?

Ben Verwaayen

So first of all I always take every competitor with a greatest amount of respect. And I’ve said it many times to people you can go on Google find over the last 35 years I have never said anything negative about any competitor. I strongly believe that competition is there to respect because that makes yourself stronger. You cannot mimic somebody else. It’s never a great idea to try to let your strategy be dictated by the opposition. I am great soccer fan, football fan. I an Arsenal fan and they have a French coach, Arsene Wenger and he always says you determine your own strategy, and let the opposite party adjust to you instead of the other way around. And I fully, of course will obey to those rules. That means that we have our own strategy and our strategy is the speed of ideas.

It is making disruptive technology available to the market that helps our customers to transform. And you know what, their world is changing so dramatically that we grew 22% in the market. And yes, we have competitors from all regions of the world. We don’t need 100% of the market. We’re very happy if we grow to 22% on a quarter-by-quarter basis which there is enough space for everybody to have different models as well.

Peter Benedict

Next question from the bridge please.

Operator

We have a question from Alexander Peterc of BNP Paribas. Please go ahead.

Alexander Peterc – Exane BNP Paribas

Yes, hi, thanks for taking my question. I would just like to understand how you see the market developing from a regional perspective where you feel, you’re most confident when it comes to carrier CapEx recovery, and where you see potential sluggishness or where you’re not for so sure. And in particular if you could detail a little bit the development in Europe, how are we doing by segment, I mean optics, wireless, wireline, IP obviously doing very well out there. So just a little bit of more highlight on the cycle where we stand now with the CapEx recovery? Thanks.

Ben Verwaayen

So clearly the US is on a trajectory that will take us a couple of years on the road. I think that what you have seen there is accelerating, what we have seen in 2011 makes me believe that the trends that you have seen will stay or accelerate. The same you can say about Latin America, there is something really happening in those markets. And the beauty of it is basically the technology used to go from place to place. You could go and visit somewhere a place where it started. Let me give you an anecdote. I love to go Davos to the World Economic Forum, being a Board member helps there. And so I was this year standing on the podium and I was looking at the first row. Those are not young techie savvy people who sit there, I mean those are different type, my age or even older.

And eight out of 10 who were sitting there, there was a tablet of them, probably an iPad. Eight of 10, a product that didn’t exist 12 months again. So it’s truly amazing how far things are going. So I think the US, Latin America, China for sure. There is something happening there that I think will have growth. Europe, I think you have seen that the growth rate was slower than the other regions. I think that will stay. What we need in Europe is a reason to invest again, and you know that the cry for broadband expansion is pretty loud from Brussels, it needs to get some teeth. And I think that the message is loud and clear, we need business models that allow and enable people to make the investments.

So I would say very positive about the Americas, very positive about APAC. I’m not so sure about Europe on the same level. I think it will be somewhat muted but there will be growth.

Alexander Peterc – Exane BNP Paribas

Thanks so much.

Peter Benedict

Next question from the room please.

Unidentified Analyst

Sorry, (inaudible) Securities. Just the question, first you had spoken about those discount rate taken in the pension fund, which have great influence on your deficit. What was the level that you hand off the year?

Paul Tufano

I’m sorry, could you repeat that?

Unidentified Analyst

What was the level of the discount rate you took care for the pension fund at the end of the year?

Paul Tufano

It was a normal Citigroup pension rates. So it must have been around, I think around I don’t know the exact number but it was Citigroup pension fund rate that we use.

Unidentified Analyst

Which is based on the fed rates?

Paul Tufano

It’s a bond index rate.

Unidentified Analyst

Okay. And my second question is little, this morning Cisco have done some very cautious comment on next year, you’re seeing very confident. Can you just explain me a little, is it mix product, is it a global situation?

Ben Verwaayen

I think I would be a very best spokesperson for Cisco. John Chambers is I know him very well. He is a fantastic spokesperson for his company. And so I leave that to Cisco. We think that the market will grow, the addressable market for us around mid-single-digits. And we think we’ll do better. And if you look to our performance in Q3 and Q4, you’ll see the growth patterns and you have seen the trends there. It’s not unreasonable to think that.

Unidentified Analyst

And the last point if I may, so the first half of 2010 was very bad in China, you think that the recovery you have done in second half is going to continue or you can have some discrepancy [ph]?

Ben Verwaayen

We gave you clear reasons why China was so bad in the beginning of 2010 because they took two decisions, they said there is a World Expo and hands of the network, and in China that is taking very seriously that said. And the second this is they said we have invested in 3G and no more and you can see that they have now resumed normal activity. Growth is 60 million new customer subscribers in one quarter in wireless. So I think the discipline that they have on one side is the same discipline you see in the other side.

Peter Benedict

We’ll take the next question from the bridge please.

Operator

We have a question from Richard Kramer of Arete Research. Please go ahead.

Richard Kramer – Arete Research

Hi thanks very much. Question for Ben, couple of specific ones for Paul. Ben, if we want to talk about normality and a company both paying a dividend like most of your peers having a normal profit every quarter during the year not just sort of at the end of the year, do you think there is going to be sufficient money in net income in 2011 and at the net income level not adjusted because it’s got to be cash to actually pay a dividend or is that something you are going to aspire to in 2012 and equally, in terms of the normal distribution should we expect that Alcatel would lose money in the first half of the year, and then make it up with the strong fourth quarter or else see a more normal distribution as most of your peers do. And then a quick one for Paul, could you tell us what sort of in your gross cash balance what might be restricted or trapped in Alcatel Shanghai Bell and Electro Banque and other areas. And whether there is any option for the Chinese government to force an IPO of Alcatel Shanghai Bell coming up to anniversary of its previous agreement I think five years ago? Thanks.

Ben Verwaayen

So a normality of a company indeed will say that you have not just in one quarter or two quarter dependency, but that you are aspiring as we said 5% will make it very, very difficult to do that all in one quarter. Actually that’s hard to imagine how that’s possible. So while we always say it won’t be a straight line always, it’s clear that the distribution over the quarter should be major improvement of what we have seen in 2010 and 2009, that was exactly what we expect otherwise, we wouldn’t come with 5% plus.

When it comes to cash flow, our first aim is to be cash flow positive, I think that’s important and once we have reached the cash flow positive status and we will have cash at our disposal. It’s up to the Board to make the further conclusions. I am not going to make any statement about any year and any number about that. It is absolute crystal clear that what we want to do is to make sure that this is a profitable company. It’s a profitable company throughout the year and it is a cash flow positive company.

Paul Tufano

With regards to the question on restricted cash, if you look at our disclosure notes, we published as part of our financials today, we indicate there is approximately little over billion euros of cash under currency restriction, and the majority of that China. And that it’s up slightly about 100 million euros 150 million euros from December of 2009. With regards to the question on whether it could be possibly be an IPO of Alcatel Shanghai Bell, we work very well with our Chinese partners. Our goal was to grow the business and that’s where we are focused on.

Ben Verwaayen

And that’s where we do in better way because China is growing very nicely as we just discussed.

Richard Kramer – Arete Research

Okay, thanks.

Peter Benedict

we’ll take a question from the room please.

Eric Beaudet – Natixis Securities

Yes, hello, Eric Beaudet from Natixis. Two quick questions if I may, the first one would be on, how do you see your wireline business evolving in 2011? You seemed more positive considering you had a good Q4, but looking at some of your big clients in the US who both who said that they reduced their wireline CapEx, I’m just wondering how do you see for you that business evolving over 2011, 2012. And the second question is more for Paul. If you could give us a rough idea of restructure cost both P&L and cash you would expect in 2011? Thank you.

Ben Verwaayen

You want to go first?

Paul Tufano

Okay. From a restructuring standpoint I think we should be around 400 million euros, hopefully it can be a little less than that but I think 400 million euros is a pretty good number. That’s cash restructuring. As it relates to what goes onto the P&L, it should be around that number, it will be slightly higher.

Ben Verwaayen

Right, on the wireline business, I think you’re right, I am clearly optimistic the new product portfolio that we have, the world goes fiber for sure. PON is growing as I said 55%. And the dependency are not in one region, I mean if you look to the business and the distribution of the business, China is a very important market, Asia Pacific is a very important market. We have talked about our contract in Australia. And there are other markets that are going in the similar direction. So I have no reason to doubt that if you look structural wise, you said 2011, 2012. So that’s the big picture thing. The world will have to go rural. The world have to go to rural areas because you cannot just stay in the cities.

The digital invite will be a bigger issue and you can see in the base. If you want to go to rural area, you need to build out the infrastructure around it and that is a wireline infrastructure that will probably have an access in a very wireless environment. The wireline infrastructure is an absolute needed part of the ecosystem, that we’re going to build. We expect more there.

Peter Benedict

Next question from the bridge please.

Operator

We have a question from Kai Korschelt at Deutsche Bank. Please go ahead.

Kai Korschelt – Deutsche Bank

Yes, hi I had a couple of questions. Firstly on OpEx, you came in sort of I think adjusted OpEx 5.3 billion euros in 2010 an given the cuts you’re guiding us to. Should we expect this level to be around 5 billion euros or lower. My second question then was just really on the diluted shares outstanding, it looks like the fourth quarter, some of the convertibles where I thought strike which was still out of the money started to creep up in the diluted share accounts. So I was just wondering what’s whether that is in accounting issue or whether we should model with the diluted shares of sort of close to 2.9 billion euros from here. And then the third question was just really on the property portfolio, if I look at the book value looks like it’s at around 1.1 billion euros in the balance sheet, I mean you’re looking to sort of sell to sell in lease backs or is it just selling or is it just consolidation sites. Could you maybe give a bit more color on whether you’re planning to monetize that portfolio? Thank you.

Paul Tufano

So look, I mean we don’t say portfolio – we’ll monetize it where it makes sense, if we’re no longer in a site as a part of restructuring, in fact we did a sale in the fourth quarter of restructured site in New Jersey. So our goal in terms of the consolidation plan is to get more efficiency in terms of where our people are, and how they can collocate, how they can communicate and at the same time as we get that efficiency to drive expense reduction. If that leads us to an opportunity to monetize an asset that’s on our books, we’ll most definitely look at that. But monetization of assets isn’t the first objective, the first objective is efficiency and speed followed by the cost structure.

With regard to your second question on what should the level of OpEx be? I think if you look at that number, and you look at the discussion we talked about expense reductions, somewhere above 5% is probably the right number.

Ben Verwaayen

The diluted shares.

Paul Tufano

The diluted shares. Quite frankly the diluted share account, there is nothing abnormal in that calculation. Its base calculation of the shares. So there is nothing in there from the bonds or even that I can think that we cause it to be different than the normal algorithms for calculating the diluted shares.

Kai Korschelt – Deutsche Bank

Okay, but you just confirm maybe that all of the convertibles are still out of the money?

Paul Tufano

It is my belief that all the convertibles goes out of the money. I can’t imagine one being in there.

Kai Korschelt – Deutsche Bank

Okay, just that in the release on page 41, there is about 700 million euros in extra shares, increase in the diluted shares, I was just wondering what that was [ph]. Okay, anyway thank you very much.

Peter Benedict

We’ll take another one from the bridge please.

Operator

The next question comes from Zahid Hussein of Citigroup. Please go ahead.

Zahid Hussein – Citigroup

Yes, hi thank you for taking my question. Congratulations on the good results. Really I want to know little bit more about the High Leverage Networks, so incredible growth rate in Q4, I want to know how sustainable that is. Obviously you got a legacy that is still growing. Just want to have an idea in terms of how we should think about that? And in terms of double-digit operating margin, Ben, used to talk about being a normal company that one that pays dividends and can be a double-digit company. Is that still feasible, would you think in the next few years or was that something that you want to address much later on? Thank you.

Ben Verwaayen

So first of all I think that the momentum should carry certainly into 2011 and beyond when it comes to HLN. Honestly I think we just got started, if you just think about the IP converging of networks and where it has to go and how many of the networks around the world are still basically overlays instead of a fully converged world there is plenty, plenty more to have. So I would not have a restrictive thought around that.

When it comes to where we are as a normal company and grow from there to where we should be as a company that is doing all the things that you mentioned. I’d like to take it one step at a time. We said we have our three years journey. We have been clear about we want to achieve. If we keep posting further objectives in later years, the only thing which is you’re going to create a kind of discussion beyond where we have the discussion for a three year period. Normally no company would give a three year outlook. We did that because we had to go back to where we have the right to have the discussion with you on a year-by-year basis. We didn’t have it two years ago, actually you had the right to ask us, get us out of the mess we were in, that’s what we’re going to do. And by the end of 2011 we have a normal conversation as any other company will have. And we will, we are very happy to entertain at the other point in time but let’s first deliver.

The most important thing that we now have to do is to execute on what we know we can and then deliver to the numbers that we have given to you.

Zahid Hussein – Citigroup

Okay, just with a quick follow-up then in terms of the guidance is plus 5% and do you think you will narrow that down during the year or is that going to really be wait till Q4 and then you’ll give us what your full-year number?

Ben Verwaayen

I think we said 5% or better.

Zahid Hussein – Citigroup

Yes.

Ben Verwaayen

5% plus. I think that’s a great guidance to work with, I don’t think that precision landing going quarter-by-quarter is a great idea. Stick to your guns and make sure that you deliver is probably what you want to see from us, that’s what we promised will give to you and therefore I don’t expect us to do further position during the year.

Zahid Hussein – Citigroup

Okay, great. Thank you.

Peter Benedict

Another one from the bridge please.

Operator

We have a question from Odon de Laporte of Cheuvreux. Please go ahead.

Odon de Laporte – Cheuvreux

Yes, good afternoon. I had a question on the IP division, I think Ben you said earlier it was now at 2 billion euros business. If I am correct it was 1.5 billion euros in 2010, are you suggesting it’s going to reach 2 billion euros level in 2011?

Ben Verwaayen

I said annualized it will be a 2 billion euros business. It is growing 49%. My ambition and I am pretty sure Basil’s ambition is not to be anywhere close of stopping. So we’re going – if anything we’re going to put our eyes in a bit further. And as I tried to explain IP is throughout, and IP is going to be the name of the game is strategic industries, and IP will not be just on the edge, an IP go and filter through some of other piece that we’re doing. So I would expect the portfolio to grow further.

Odon de Laporte – Cheuvreux

And just a quick follow-up on the services division. Could you explain why profitability was under pressure this year?

Ben Verwaayen

So there are two things. First of all maintenance as Paul explained, maintenance was a relatively high margin business and it came under pressure by of course cost cutting of our customers especially in Europe and all the vendor maintenance and the pricing of take down on maintenance also came under pressure. So those were two of the elements. Then if you look to new build especially in the Middle East, new build was down substantially in quarter, what was growing very nicely is the let’s say the new stuff, everything around application, application enablement, systems like IPTV and others.

And they have very good margin structure. And but if you look to the mix, that’s the answer, why it’s somewhat down this year, but make no mistake about it, our team is extremely highly motivated to rule as I said, exactly the same trick that we’ve done in our product portfolio and make sure that you renew it and get your services focused on there where we make the most impact.

Odon de Laporte – Cheuvreux

It’s very helpful. Thank you very much.

Peter Benedict

We’ll take two more questions. The next one from the bridge please.

Operator

We have a question from Simon Leopold of Morgan Keegan. Please go ahead.

Simon Leopold – Morgan Keegan

Great, thank you very much. I wanted to see if you could give us a little bit more color around how you’re getting to your view of the overall addressable market growth in terms of maybe mix and trends and specifically carrier CapEx. And the other aspect is if you could drill down a little bit more on your wireless business, because as you mentioned that’s been a focus for investors who have concerns about both the scale and the trend, and if we could get a little bit more color about what’s driving that given the or what I would say is our limited understanding of your mix of mature technologies like GSM versus the growth your areas like LTE? Thank you.

Ben Verwaayen

You want to give a shot on the margin structure of our wireless business?

Paul Tufano

Sure, if you look at our margins, if you look at our wireless business obviously and we saw a very strong growth in WCDMA, over a 40% for the full-year. With GSM and CDMA at nominal growth asymptote. So I think that, that structure I think will continue for some – in at least 2011, I think there will be legs on GSM, there will be growth in CDMA. So won’t be as much of a decline as it was in the past. I think CDMA is going to – WCDMA is going to grow dramatically. In LTE, we had a 100 million euros plus revenue in the fourth quarter. It will contribute as we move through ‘011 and into ‘012. So I think that the mix is a proportion of the right mix, I think the other thing that’s probably most important is that we’ve taken dramatic actions on WCDMA to converge the platforms to get to a better cost optimized product and that’s going to drive better margin structure in ‘011 and ‘012.

Ben Verwaayen

I think a lot of the bleeding that we have in the past in the wireless is behind us. And we should be able to enjoy a normal status when it comes to the margin in a competitive market, but the bleeding that we had a long time is behind us. So that’s important. If you look to the CapEx from our customers, it depends market by market where the focus is, but there are two main messages. First one is as I explained the fact that the consumer want to go screen to screen. So they have to make sure that what they deliver on the small screens is the same video capabilities they have on the big screens. That means that you have to go IP end-to-end, that you will see there is a lot of the investments, and the second investment is you have to deal with the factor there is an explosion in applications. How do you deal with that will require, look to our IMS business. IMS core business. Look to some of our IP business that we created. Look to the application name on platform and the number of customers that we have for that.

So those are the two main drivers. Where do I find my new revenue is the number – question one for our all the operators, and second if I find my new revenue how do I make it profitable by reducing my transport cost, by reducing my complexity cost and making sure that I can deliver to our customers. It’s seamless experience. Those are the things and it doesn’t matter whether you are in Indonesia, in Brazil or in New York City. Those are the question that they have to be answered. And since we are right in that sweet spot with our product portfolio in the choices that we have made, we are pretty optimistic as we have tried to explained to you for 2011.

Simon Leopold – Morgan Keegan

Thank you.

Peter Benedict

So we’ll take one last question from the bridge please.

Operator

We have a question from Gareth Jenkins of UBS. Please go ahead.

Gareth Jenkins – UBS

Hi I have a couple of quick questions and maybe statements. So I just wondered if firstly you could give us a sense of order bookings and maybe HLN within order bookings. Secondly, I guess in terms of the silos breaking down, operators and HLN strategy generally. Can you give us a sense of some contracts outside the US, where maybe you’ve been able to exhibit some pricing premium over cheaper competitors because of your software strategy? And then just finally on acquisitions, I just wonder whether they are back on the agenda, knowing Nortel’s intellectual property businesses up perhaps at the moment and I wondered if that’s of interest. And then final statement, as a Tottenham fan, Ben wish your team all the best of luck of course against Barcelona next week.

Ben Verwaayen

I was touched by that last two remarks. So you want to say a few words?

Paul Tufano

Sure, so if you think about, let’s take acquisitions first, I mean acquisitions, we’re never off the table. We’ve done a number of them over the course of the last two years. They’ve been small but they’ve been laser sharp focused and how to increase our capability. We always judge acquisitions very, very honestly, I mean we are – we scrutinize them because we don’t want any more complexity to already complex (inaudible), but there is value we will look to make the investments. So the doors were never shut in acquisitions, these just had to be right ones. That’s the first point.

On your second point question, I apologize I got lost with the football analogy.

Gareth Jenkins – UBS

Yes.

Ben Verwaayen

So let me then take the second one. I don’t think that I am going to give you a list of customers where we got the premium. I am not sure that that is a wise decision to go and answer but let me try to say it this way. The US is a very good market for us because we understand that market in and out. China is a very good market for us because we understand the market in and out. There are markets that you have a better traction because of the relationships with customers in other markets. Once you come in on a product only basis, it is harder to make the right strategic relationship. And if you are able to expand to that, and make it into a solution sale. And solution not being everything in one box but the solution that you have a multiple layers in the organization in your relationships.

So we work very hard to be a differentiator with customers not on a per box basis making sure that you work the different layers in the organization together to build that solution base which sometimes includes software, sometimes includes services, sometimes includes hardware. So that’s how I view your margin structure. There where you understand your customer better and you work stronger with your customer on a longer term, normally the margins are much better.

Gareth Jenkins – UBS

And just on the book-to-bill?

Paul Tufano

If you look at the book-to-bill, we’re exiting the quarter, I guess in the fourth quarter with a very strong backlog. And in fact, we saw a good strength in some geographies in terms of increase. We’re pretty – we’re pleased with where we are right now.

Gareth Jenkins – UBS

Thanks.

Peter Benedict

Okay, well thank you very much.

Ben Verwaayen

Thank you all. Thank you and see you next time.

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