Alcatel-Lucent Q3 2007 Earnings Call Transcript

Oct.31.07 | About: Nokia Corporation (NOK)

Alcatel-Lucent (ALU) Q3 2007 Earnings Call October 31, 2007 8:30 AM ET

Executives

Pat Russo - CEO

Jean-Pascal Beaufret - CFO

Analysts

Tim Boddy - Goldman Sachs

Tim Long - Banc of America

Stuart Jeffrey - Lehman Brothers

Alexandre Peterc - Exane BNPParibas

Andrew Griffin - Merrill Lynch

Phil Cusick - Bear Stearns

Kulbinder Garcha - Credit Suisse

Simon Leopold - Morgan Keegan

Remi Thomas - Cheuvreux

Paul Sagawa - Bernstein

Francois Duhen - CM-CICSecurities

Ken Muth - Robert Baird

Nikos Theodosopoulos - UBS

Operator

Hello to everybody. And welcometo our Third Quarter 2007 Earnings Call. With me today on the call are PatRusso, Alcatel-Lucent--CEO; Jean-Pascal Beaufret - CFO, and other members ofthe management team. Pat and Jean-Pascal will provide an overview of our thirdquarter results and discuss the market and company outlook. Later in the call,we will conduct a question-and-answer session. Please restrict yourself to onequestion and no follow-up questions, please.

If anybody has not seen a copy ofour earnings; please refer to our website at www.alcatellucent.com. Before westart, I would like to remind you that certain statements we will be makingtoday maybe considered forward-looking. Please refer to the Safe Harborstatement contained in today’s releases. Now, at this point, I’d like to turnthe floor over to Pat.

Pat Russo

Thank you, Scott. Hello everyone.Thanks for joining us. As you know, earlier today, we announced our auditedresults for the third quarter of 2007. Our results this quarter wereessentially in line with the update we provided on September 13th in a fewareas a bit better. However, they are still not at the level that we aresatisfied with and I will be talking with you about our going forward planafter we go through the results.

Jean-Pascal will now review thosequarterly results in more detail and then, as I said, I will get into some detailwith respect to the three-part action plan that we are putting in place toimprove the profitability and the top line of the company. Jean-Pascal?

Jean-Pascal Beaufret

Thank you, Pat. I am on chart 5.Good afternoon and good morning everyone. As usual, I will present our earningson an adjusted basis net of what you know as main purchase price accountingentries for which we are giving details in the appendices.

When looking at this result thisquarter and comparing with them, we saw last year’s pro-forma adjustedSeptember results; we also need to bear in mind that there is a significanttranslation impact from [overhead] changes. We were 127 as average in Q3 ‘06 to137 average rate in Q3 ‘07 and this, as you know, impacts our top line and ourcosts and expenses line.

Inline with the update that weprovided on September 13th, revenue for the current third quarter were 4.350billion. They were up sequentially 2.3%at constant rate, which is 0.6% on an actual rate basis, and showed a negative7.8% growth year-over-year.

Our gross profit of 1.486 billion,or 34.2% of sales, represented margin increase compared to the 33.4% marginlast year, the Q2, the June quarter of 0.8 percentage points. But thatsequential margin increase goes up to 1.3 points if we were to normalize the 34million or 0.5 points, which was a positive significant item, in fact reportedin the June quarter.

You remember this was a favorablelitigation settlement. So, this is sequentially encasing our adjusted grossmargin of 1 points to 3 points should be primarily attributed to lower fixeddurations and installation cost, lower reserves, which are more than offsettinga negative mix impact and the price erosions, which we are experiencing inthose quarters.

We believe this represents apositive trend going forward on Q2 to Q3 and so, we may still see quarterlyfluctuation due to geographical and product mix. This is a positive trend Juneto September. The company’s adjusted operating income for the quarter was 70million or 99 million improvement sequentially resulting from both the grossmargin increase that we just discussed, and the success of the ongoingstreamlining efforts in our cost structures.

I would like to note as well thatthe operating income as progressively improved throughout the year from Q1 toQ3, and I remind you that it was €244 million negative in Q1, and €19 millionnegative in Q2, and it goes to a €70 million positive in Q3, which bodes wellfor the recovery of our results of financials during the year. It’s turning nowinto positive territory and is due basically to cost margin consolidation andcost reduction efforts.

On chart number 6, we are showinghere the adjusted operating expenses evolution and I believe that we can saythat in the September quarter, we have made big progresses in reducing our OpExbase sequentially, our reported operating expenses reduced by EUR 50 million.

Remember that in terms of scope,we look at operating expenses on a comparable basis, which is actually the onlyway to properly analyze the year-over-year evolution and which means that weare taking into consideration the change of scope with significant acquisitionssuch as the Nortel Wireless portfolio at the end of 2006.

However, the impact of R&Dcapitalization, or some one off mentioned last year, and we are taking accountof the Euro - US dollar exchange rate valuation, which are positive from thecost. As a reminder, 137 in Q3 ‘07 compares with 127 in Q3 ‘06 and 135 in Q2 ‘07

So, what does it lead us to? Weobserve that Q3 comparable operating expenses, the September ‘07 comparableexpenses declined 5.6%, as you can see on the bottom part of the chart, or 87million relative to the same period last year, and also declined sequentiallyby 3.4% or 47 million versus June quarter.

Over the last three quarters,since the end of 2006, our comparable operating expenses have steadilydecreased. To date, the cumulative savings, which we have recorded at thislevel, is on a comparable basis approximately 160 million. As we said earlierin the year, OpEx reductions are positively accelerating and they are becomingmore visible in the second half of the year.

In R&D, for example, theyear-on-year comparable OpEx reduction was 8.3% in the September quartercompared to 3.8% reduction in Q2 ‘07, and 0.6% reduction in Q1 ‘07 versus thesame period of ‘06. In sales and marketing, general andadministrative expenses year-on-year reductions were 3.2% compared to2.3% reduction in Q2 versus the same period of last year. So, we are confirmingthat there is an acceleration, which makes our operating savings more visiblein the second half of the year.

The remaining item in ourscorecard is concerned, of course, with the operating headcount. In the thirdquarter, we recorded a reduction of about 1000 positions in our net operatingheads, which makes the net reduction since January 1st at 3,700, which the netof 5,000 execution of our savings and 1,300 heads due to the in-sourcingmovements that we have recorded in the 2007 year.

Now, let me provide some commenton our operating segment, which is on chart number 7. The Carrier Segment, overall-- the revenues for the quarter -- were 3,142 million, which is 12% declineyear-on-year, but a 2% increase sequentially those are of course at constantexchange rate.

Adjusted operating profit for theCarrier Segment was 22 million, 0.7 operating margin. The investments, of whichwe have spoken about in both geographic end-markets and technology particularlyin wireless and convergence, over the past quarters, clearly still impact thisbusiness segment as the execution of our new complex take a few quarter.

Going into detail of eachbusiness group performance, this is good performance. We can state today thatWireline Business Group had a EUR 1,520 million 8% increase versus a year agoquarter, 2% increased sequentially. Optical networking demonstrated very strongdouble-digit growth year-on-year, with growth both in terrestrial and a robustdouble-digit growth in submarine.

Broadband access in terms ofvolumes registered 8 million DSL lines delivered in the quarter, which is plus20% year-on-year. IP DSLAM platforms two-third of the over whole line shipmentsin the quarter.

And IP data showed another verydynamic quarter with strong revenue growth year-over-year, with continueddouble-digit growth in IP more than offsetting the decline of the market in [MS1]portfolios.

Wireless Business Group had revenuesin the September quarter of 1.276 billion, 20% decline compared to year agoquarter, that a 4% increase sequentially. The year-over-year revenue decline islargely due to comparison, which was exceptional with the strong CDMA revenuesin North America that we booked in the year ago September quarter, when webooked deployment of Rely 27, EV-DO Rev. A following the commercial availabilityof the related softwares in September ‘06.

But if you see in CDMA declineyear-over-year, significant decline we see sequentially CDMA revenues growslightly CDMA gains outside North America and primarily in India more than offset the declines that we seein North America.

WCDMA revenue increased over theyear ago September quarter and GSM declined from the year ago quarter, butcontinue to gain traction with a second consecutive double-digit sequentialincrease and this is not [represents] to the renewed product offering, which isas you know, we call Twin TRX and ATCA based BSC. Because we believe that themobile Operators migrate to all-IParchitectures or migrating today into all-IP architectures.

We will show now new numerous WiMaxcommercial contracts in Q3 such Pakistan Mobilink, such as VSE Net in Germany, such as Far EasTone in Taiwan, such as Russia’s Synterra. And if it notreflected in the sales of the quarter it bodes well for the growth we areexpecting in this very, very interesting period.

Convergence Business Group revenueswere EUR 346, 39% decline year-on-year, 3% decline sequentially.

I will turn now to the EnterpriseSegment, which with revenue of 380 million grew 8% year-over-year and 2%sequentially. This is taking place across all part of the enterprise businesswith a very, very significant performance in Asia-Pac. Adjusted operatingincome was 29 million, with a 7.5% operating margin; this is the continuedimprovement in profitability quarter after quarter and an increase in profit inthe enterprise segment from the year ago quarter.

Finally Services BusinessSegments went well in the September quarter, revenue were 777, which is anincrease of 3% year-over-year, 4% sequentially. Adjusted operating income was40 million, with a 5.2% operating margin. This segment also improved theirprofitability for the September quarter, plus there is a 3.9% operating marginthey had in Q2 and negative in Q1 ‘07.

So, here we have several movementswhich are implemented. First of all, network operation is growing very sharp.Network Integration Services is we are continuing to focus on growth areas suchas IP transformation, application integrations are doing as well, and we have seen multi-vendor maintenance aswell.

We are worried about restructuringcost. The cost of goods provides, as you know, an idea of speed at which we’reexecuting our integration plan. So, we have booked 307 million restructuringcost, practically all our in many (inaudible). This is representing 803 millionyear-to-date, which is about 50% for initial three year targets, cashrestructuring costs target. And the vast majority of these provisions werecovering separation cost in our restructuring plan in developed primarily in Europe.

You may recall that we signed anagreement with the French Unions on September 13th, and in Germany we arecontinuing to execute the voluntary program. We have seen over the Septemberquarter real acceleration in the number of departures in high growth countries.We have at the end of the quarter 903 million reserves, as we have provided for903 million, and we have utilized during the quarter 128 million. Out of this300; we have spent 310 since January 1st ‘07.

As we are doing usually, I wouldlike to give you some example of the implementation of our plans. The majorthing, I would like to point out is at the Business Group Level, we arestreamlining our business operations better today. You know that we have builta Carrier Business Segment, which is being simplified under Michel Rahier’s lead today byeliminating the intermediate business co-player, which we have called Wireline,Wireless and Convergence and we are reducing from 11 to 7 the number ofbusiness divisions.

The seven fully empowered profitcenters operating business divisions, worldwide P&L accountability,[know-how] applications, CDMA networks, fixed access, IP networks, mobileaccess, multicore and optics. Its basically want -- about technology segment.

In Procurement, we will exceedour annual savings objective. So, we have implemented for examplegeneralization of E-auction. So, we are comfortable that we can exceed oursavings in procurement this year.

We are doing significant progressin the optimization of R&D expenses especially derived from the productrationalization. We are taking some additional actions to size the R&Dinvestments with the new market dynamics we do see.

On short-term, I would like tojust to mention that we are at comfort level announced the closure of twoadditional facilities in North America formanufacturing. We are well advanced in IS/IT we believe that we will achievemore than the initial savings that we intended to execute this year.

In finance we have consolidatedone shared service center into Europe by taking out shared service center in Dublin and growing one shared service center in Romania.And in real estate, the quarter has been the occasion to significant in theexecution on our plan. We have taken out and we discontinued 350,000 squaremeters, which is year-to-date from January 1st, which is about 8% ofthe total square meters of the company.

Now coming to cash and workingcapital and balance sheet, I’d say that the main event in the quarter, and Iwill briefly comment on that is, we have working capital, which is representing10% of our trailing 12 months revenues. This is standing in the 8% to 12% rangethat we have been indicating for 2007, with possible fluctuation fromquarter-to-quarter. The increase in the operating capital ratio is mainly dueprimarily due to an increase in inventories and is reflecting stronglyseasonality expected in the Q4.

We have to mention as well thatwe have reduced the amount of receivables that we had factored by about 175million sequentially, which explains part of the increase in the operating workingcapital.

In terms of cash flowAlcatel-Lucent in the September quarter generated cash flow from operation of206 million before restructuring working cap, interests and taxes and CapEx. Wehave experience a sudden -- we had experienced in the Q2 ‘07 a significantamount of reserves in the provisions part of it being upfront.

So, we don’t find them again interms of cash and we have seen, on the other hand, a utilization of thisreserves in Q3 ‘07, which explains the decrease from 280 to 206. Restructuringcash outlays, as I said, increased to EUR 128 million from the EUR 99 millionin the June quarter, intangible CapEx and R&D capitalization were EUR 190.Overall resulting in a negative free cash flow of more than EUR 9 million.

The last word and the lastmessage related to the funded status of OPEB pension and now that thepostretirement benefits. Some of you may have been be concerned about possibleimplication of the recent sub-prime casing. So, I’m not giving you here theshare value of the assets that we have recorded from June 30th to September 30th,and given the important devaluation expense but the [occurrence] by the dollaragainst the euro this is also given in dollars.

So, we see that the total assetshave increased from $39.7 billion on June 30 to $40.3 billion at September sothis which is a growth of 1.4%. While the benefit obligation remains fairlystable in US dollar at $37.7 billion, no material change in discountinginterest rate was reported over the quarter.

So, the funding status of OPEBpension and OPEB obligations continued to improve quarter-after-quarterstanding at the end of September at $3,453 million. So, one last thing, if Imay, is that we are providing in appendix to this debt, to this earning course.The 2006 adjusted pro forma income statement, which is restated for some minorreclassification issues. But it would be the last time that we redo 2006 pro-formaaccount.

With that I believe that I shouldturn it back to Pat.

Pat Russo

Okay. Thank you, Jean-Pascal. Andthat concludes our review of the results today. I would like to turn ourattention to our plans going forward. And I will address the issues that I knoware foremost in a number of your minds that is with respect to our portfolio,whatever we doing profitably grow and address the financials under performancein some areas of our business.

And whatever we doing withrespect to the cost structure and driving to fit that competitive financialprofile. So and then I will also spend sometime talking about the managementstructure we are putting in place to create a more efficient and focusedoperating model.

So I will spend the rest of thiscall talking about our plan of action, which was fully supported by our Boardof Directors yesterday. Just a couple of contextual comments. The work for thisplan began back in the July timeframe. It reflects a lot of thoughtful work bythe management team. It is not a plan that is solely focused on costs, but alsofocused on selective profitable growth opportunities that we are pursuing. Andit’s a plan where the ownership for execution is clear.

Three parts, that I would to talkabout first. We are streamlining our core carrier business in a number of ways,as there are a number of efforts that Michel is leading, including aggressiveproduct cost reductions and improvements and greater focus in R&Dpriorities that supports the IP transformation that is not only going on inwireline, but now we see beginning in the wireless networks.

Second part of this plan is aboutenhancing our growth by developing an offensive strategy to address the sectorsof the market that we see that offer strong potential and that align well withour assets and our capabilities. And the third aspect of this plan is thestreamlined organization into a more simplified model with a focused managementcommittee that has clear accountabilities and ownership for execution of theplan.

Next chart really just speaks toand I won’t go through all of these, these are really the macro trends that wesee that affect both our Carrier and our Enterprise business and that reallyinform our strategy and our investment. And so, without going through all ofthese, I think it’s important only because it’s our view that these are thetrends in the market that really underpin our convictions about what is goingto take to really compete over the long-term, as a Tier 1 player in this space.

The next chart is merely justprovides a size of the opportunities. And I think, the good news is that theCarrier Segment is large and while in the aggregate it is a slower growingsegment, there are a number of faster growing opportunities such as optical anddata, and Jean-Pascal shared with you the kind of results we are seeing there,and we intend to continue to invest in that area that offset somewhat thedecline in the legacy infrastructure spending.

Services, is the large segment. It’san area that we are strategically committed to and we have been making progressthere with more to do. Applications, while a smaller market has very goodopportunity for growth and I will say more about that and obviously theenterprise market is one that is also a large market. We have a good business.It’s been growing nicely, performing well and we believe we have opportunitiesthere.

On the one hand, it’s always goodto look at the opportunities in the macro trends and the opportunities in ourmarket are encouraging, at the same time I think you all know that the marketis quite challenging and changing. And so these are the market disruptors ifyou will that we operate within.

The only point I would make here,is that it’s very clear, that the work we do, the plans we have and the planswe will execute had got to provide improvements on all of our line items in away that offsets the impact of some of these market dynamics. And the onlyother point I would make is that, while driving cost structure improvements, isthe clear priority for us and our plan clearly contemplates that. At the sametime, we have recognized, we need to drive profitable top line growth at thesame time.

Next chart is a, really a simplepictorial of our strategy. What it basically says, is that we believe we havegreat value in the carrier business. Clearly, we need to fix theunderperforming aspects of it. But there is no doubt in our mind, that theassets that we have, the technology leadership that we have, in areas like IPand broadband access and optics and this IP transformation. We are able toleverage across fixed and mobile networks.

At the same time, we are lookingto branch out and do more in the area of services and applications, and as wellin the area of enterprise and what we are calling the industry and publicsector markets which are industry segments that are unique in that base theyneed complex mission critical communication systems that really span ourCarrier and our Enterprise portfolio. So, let me move on now and just speak alittle bit more specifically about each element of the plan.

The first element of the plan isthe streamlining of our core carrier business, as I said with an increasedportfolio focus on IP transformation. We extensively reviewed our portfolio andwe do believe looking back to the macro trends we talked about to what we seeour customer needs to be, but it aligns with where the market is going andenables us to really deliver an end-to-end set of capabilities.

Our IP expertise, which has beendeveloped in our wireline business, has board application across our wirelessbusiness and so not withstanding some underperformance in some areas, thebreadth of our portfolio is an asset. So, we have made the decision not to exitany major areas of the portfolio. So, if that’s the case what are we doing inorder to drive improvement? Michel has a very aggressive and accelerated effortunderway to improve product costs.

He has an intense focus onR&D and the opportunity to be more aggressive around the use of commonplatforms across the portfolio and also focusing R&D in a way thatdifferentiates parts of our portfolio, such as Wideband CDMA with the newertechnologies, where we have leadership positions, such as the Femto and theBSR.

At the same time, we arestreamlining the carrier organization as Jean-Pascal described. Michel is alsostreamlining the operation such as in the supply chain and the collapse of 11business divisions into 7. The efficiencies we gained from these actions andothers will allow us to improve gross margins in a measured way in our CarrierGroup.

Let me move to the next chartthat focuses on wireless. There is obviously been a lot of discussion inspeculation and commentary regarding our wireless business. Let me be clearabout our convictions and about the facts. In terms of convictions, here iswhat we see. If you look at the big picture, what’s it take is the evolution to4G and what that evolution will look like.

We think that the rules of thegame are changing. As IP transformation is just beginning with mobile networks.For example, fixed technology such as IP and Optics products are already beingused in mobile networks for IP based aggregation and backlog. And that’s why webelieve we can leverage our extensive IP capabilities and proven leadership inthese key technology areas for the IP transformation that is yet to come andwill take place in wireless.

So, to be a leader in the worldof 4G and to be preparing to be a leader in the world of 4G, we are serviceproviders and more and more combining of fixed and mobile assets. It’sessential for us to be a participant and a leading participant in both Wirelineand Wireless.

Now, let me share just a fewfacts about our Wireless portfolio. For GSM, we have a refreshed portfolio. Itis gaining solid traction. We see that in the results this quarter and theorder backlog. This is a profitable business and we will continue to pursue newopportunities here. By the end of 2007, we expected more than that the majorityof the GSM products, we ship will be based on the new portfolio, which beganshipping in the second quarter and we expect to further gain share in 2008.

In CDMA, as you know, this is aprofitable business and a mature market that is starting to decline. And aswith any product that reaches a mature point in its lifecycle, we will moderateour R&D investments in the current generation of CDMA to reflect thedeclines that will naturally take place. Let me assent to add that where thereare new opportunities such as in voice-over-IP and the next revisions of CDMA,we will continue to investment to support our customers’ migrations plan andtake advantage of the opportunity in the marketplace.

The IP capabilities of EV-DO arekey and provide another example of the IP transformation that’s happening inmobile networks. For CDMA to the area that has come under a lot of scrutiny.There is no question that 2007 has been a year of investments. As we have takenthree portfolios and began the work in January to converge them down to one.

By now, we have completed theconvergence from three platforms to two, and we will have a single and highlycompetitive converged platform by the third quarter of 2008. What kind ofprogress are we making commercially? Since the merger we continued to make progress,we have signed a significant part of the Wideband CDMA contracts that have beenawarded since the beginning of 2007, including SFR, ANCEL, Globalcom, TelecomNew Zealand

We were one of the firstworldwide to demonstrate and introduce HSUPA commercially, and recently HSUPAintroductions were made with us by two of our customers: SFR and Orange. Goingforward, we will continue to rationalize the R&D investment. We will boostour investments to leverage the growth opportunity we have in the instance inthe area of Femto Cells. For example, Softbank recently selected our Wideband CDMABase Station Router Femto for trial of high-speed mobile in-building solutions.

And based on our flat IParchitecture, this Femto flattens the mobile network by integrating andcollapsing the radio access network elements, including the base station andradio network controller into a single small unit about the size of a TV. So tosum it up, we have a number of things underway to improve our performance herein terms of R&D efficiency, simplicity of the moving toward a convergedplatform. We know this scale matters in this business and we will selectivelypursue additional Wideband CDMA opportunities balancing our intent to growshare with the focus on profitable growth.

4G and LTE, were really in theinvestment phase one comment on WiMax, we are market leader there with morethan 15 commercial contracts and the underlying technologies of WiMax, which isOFDM for example play a key role in the evolution of 4G. Quickly the wirelessroadmap chart really just hands to point out that the next generation ofwireless technology is based on some fundamental evolutions of things likeOSDM, MIMO and IP all of which are already available in WiMax.

And we believe that this willgive us a competitive advantage, as we leverage our R&D efforts across themultiple technologies we are participating in. And our common platform approachwill allow us to help customers migrate from any wireless technology to anywireless technology.

Now, wireline portfolio, I reallywon’t say much here rather than we are performing well. And we intend tocontinue to improve the performance in this business. Our integration hasproceeded quite well. Our strategy is simple. We have well recognized marketleadership with considerable strengths and capabilities in access, IP andoptics.

And we are going to continue toleverage those, as we pursue the end-to-end place, while, we are wellpositioned in this space. We have an accelerated product cost improvement planto generate savings that should lead to gross margin performance enhancements. Inour core NGN business, which has underperformed this year, we are makingrefinements to narrow the portfolio and allow us to leverage a common SIP andIP based infrastructure for both fixed and mobile networks. This is a revisionbeyond our original plans.

So, let me move on now to thedata about the portfolio. I would like to talk briefly about some of the areason which we are focused for growth. Isaid we were developing an offensive strategy to address some sectors thatoffer good potential for us. The first is those, that I would talk about is aservices, there is really two points. If you look at the growth of our servicesbusiness and the growth of our product business, you can see increasingly somegrowing disconnection that means, we are winning business that is notnecessarily product attached or attached to our product business thatconsistent with what we been trying to do.

We continue to see terrificopportunities and what we call high value services, integration services andprofessional services. And we will continue to increase our resources to growthere. At the same time managed services is a different picture. There is nodoubt, that the trend in the market is to move to more -- Operators are movingmore and more to outsourcing some of their operations.

Our game plan here is to take adisciplined and selective approach, when pursuing these new managed serviceopportunities. The interesting thing here is, there is a significant amount ofgrowth opportunity, but we’ve got to be balanced in our appetite forparticipating in these, given the impact in year-over-year that they have onmargins. So we will be selective. We will be strategic as we assess this.

In the applications area, this isan area that has not got enough attention from us this year in terms of ourgo-to market. We will be doubling the resources that we dedicate to this area.We have a good portfolio. We are streamlining the portfolio, which means we arereally only got a focus on the areas that offer the greatest market potential.So, streamlining the portfolio, which means we will be reducing it somewhat anddedicated doubling of the resources to go after this.

The margins in this space aregenerally higher than the average of the company. In the Enterprise space, two things really to talkabout. Our Enterprisebusiness has been performing well. We see opportunities to enhance our growthhere. There are some organizational changes we are making inside the enterprisebusiness to dedicate more selling resources. We believe this will help with ourtop-line growth, as we go into 2008.

And I want to be clear againbecause there is lots of speculation. We have no intention to sell or exit thisbusiness. In fact we are looking at what opportunities, we have to expand thisbusiness and believe we can play more broadly. We need to do that in a smartand creative way. But this is an area of strategic importance for us.

Another segment that we havepursued and this is another area, where we will be significantly increasing ourresources, as we shift them from lower growth opportunities is in what we callthe industry and public sector markets. We have five industry segments that weare pursuing. These are generally 10 point higher margin opportunities for usbecause they integrate Enterprise,Carrier and Professional services.

They are usually large complexdeals with long sale cycles. We have been investing in this through ‘07. We seegood traction, and we see the opportunity with even more resource to accelerateour growth here. So, that encapsulates the areas that we are strategicallyattacking from a growth standpoint.

Let me now speak to the thirdaspect of the plan, which is the streamlining of our organization, thesimplification and the establishment of a focused management committee. Wealready took the action around the Carrier Group, which we have described -- Iwill belabor that, but that’s a major set of changes for us. At the same time,today we announced a simplification of our regional structure from 4 to 2.

We will have the Americas, and then the second is Europe, MiddleEast, Africa and Asia. And this two we willput into effect as we go into 2008, but it should allow us to continue tosimply and streamline our organization. Another action that we are taking is weare combining the all of the innovation and research capabilities that we have.The two organizations Bell Labs and the Alcatel Research and Innovation. Thisdoes not mean a shift to where people are, but it does will enable us to drivemore synergies.

And lastly, we are modifying ourgo-to market strategy in certain countries, where our margins are poor. Todaywe operate in about 130 countries. We done an analysis and there are somewherearound 15 to 20, where it is clear that the revenues are small and we are notprofitable, given the level of business that we have there. And so, we areadopting for each one of those an alternative go-to market strategy that allowsus to continue to support customers but do it through a different means.

The last point I would make isthe establishment of management committee, where if you think about the plan I’vejust taken you through, this is where the clear accountability and ownershipfor the execution of these plans resides. This is a team that will oversee thecompany strategy, direction, organization all of the things that you wouldexpect.

These are folks that I haveselected, who will make sure, who own the plan and they will make sure that theplan gets executed. Everyone is the members of this team is here not onlybecause of his or her responsibility, but because they bring a good deal ofexpertise. So, with that I will just close by commenting on the fact that wehave been asked a number of times for what are some longer-term targets that weshould think about for the company.

As we did the work on this planand moved it forward if you will, we are targeting, as we come out of theintegration period. Gross margins in the high 30s and operating expense torevenues in the high 20s such that we are able to deliver an operating profitin the 10% plus range, as we finalize the integration of the companies.

So, I have shared with you kindof a three part plan that I think puts this company on a path to continuedimproving profitability as well as growth for the future. We are committed toand confident about our ability to execute this and the potential that itcreates for us.

So, with that, I will stop and wecan open it up for questions.

Question-and-Answer Session

Operator

Thank you. (OperatorInstructions) And we’ll take our first question from the line of Tim Boddy fromGoldman Sachs. Please go ahead.

Tim Boddy - Goldman Sachs

Yes. Thanks for taking thequestion. I first want you to ask about the commitment to the Wirelessbusiness, and we just understand much of the dynamics there. It was a verypleasant surprise to learn that GSM is actually profitable. But that of coursemeans that obviously imagine CMDA continues to be profitable. That means thatthe losses in WCDMA must be almost as biggest sales line.

It will be very helpful tounderstand, how you see the profitability of the WCDMA business unfolding andwhat portion of those losses being currently represents or if you like one-timerelated to the platform transformation or migrations, where you are sorting outcustomers other similar activities. So you mentioned mid '08 this is turningpoint, but finally one portfolio. If I get understand those dynamics best thatwill be helpful.

Pat Russo

Okay. I mention and I wouldMichel comment here in terms of more specific. I mentioned mid '08 thirdquarter ’08 is when we expect to have completed the work to converge down toone converged platform right. And so we clearly would expect that the R&Dinvestments that will change pretty significantly as we’ve now going from 3 to2 and then down to 2 to 1.

Our expectation is that thecombination of aggressive product cost reduction work, R&D, improvedR&D as a percent of revenue give the expectations we have to able to growafter this initial year of transition as well as the selectivity we expect toreply to going forward business, we will make improvement year-over-year in thefinancial performance of this part of the business. Michel anything you want toadd?

Michel Rahier

No

Tim Boddy - Goldman Sachs

Just to clarify, do you think thebusiness will actually be profitable in ‘08 or ’09 that we’re looking at forthe WCDMA business?

Pat Russo

Yeah. I won’t give you specificsaround profitability of the business. I will say though that in 2007, there issome onetime impact on the current profitability of that business given whatwe’ve described earlier in the year around some of the swap work that we aredoing and the fact that it is not captured under restructuring, but ratherfalls into expense. But what you should expect is improvement clearimprovement, as a result of the consolidation of the platform and all the otherwork that we are doing. But this is not going to be a one year plan.

Tim Boddy - Goldman Sachs

Okay. Thanks very much.

Operator

Our next question is from theline of Tim Long from Banc of America. Please go ahead.

Tim Long - Banc of America

Thank you. Just a question, as itrelates to the new restructurings, as well. You did mention in the release andon the call here that not all of the gross margin savings in '07 are not beingretained but the OpEx are. What complexity do you have that as we go into '08and '09 something will change either in the industry in your product portfoliothat will allow those gross margin savings that you’re expecting to flowthrough to the bottom-line? So, what do we need to see change from an industryor company perspective to feel better about the flow through of those costs?Thank you.

Pat Russo

I think the difficulty of coursethis year it's hard to see savings on a gross margin line. Obviously, when yourgross margins are down year-to-year, even if you are actually achieving thesavings. The combination of factors that have to occur is actually improvementin gross margin from where we are and we demonstrated some improvement thisquarter over last quarter.

We are working hard to work atvery aggressive product cost reductions. So that will be an excess of what wethink is needed, given the price erosion in the industry. We continue to expectto get additional procurement savings carry through as we go into 2008 and2009. And we expect that the fixed cost is that, affect the gross margin line.Obviously, we are working to improve.

So, we have lots of efforts toimprove the cost structure of all of the things that affect the gross marginline. And all else being equal, you’d like to see some measured improvement.What is unknown as this always the case in gross margin is what’s happening interms of price intensity in the industry and obviously with mix?

So, if you think about what Isaid, we are focused on growing in the areas where we have more opportunity forprofitable growth. We think that will help somewhat again. These are not short-termplans. They are short-medium and longer-term plans. But, I would hope that withsome gross margin progress, we would start to be able to see the impacts of oursynergies that affect gross margin.

Tim Long - Banc of America

Just a follow up is there a riskthat pricing needs to be more firm for Alcatel and therefore, there would be afurther top line impact or is your expectation that all of it, what will comeon the cost savings side?

Pat Russo

I am sorry. Tim, I didn’tunderstand that.

Tim Long - Banc of America

Is there a risk that to get tothe better gross margin, you going to be need to be more firm on pricing andtherefore risk losing business and have a top line impact?

Pat Russo

Yeah, just to be clear. We have nodoubt; we came into 2007 in the very early stages of the merger. We were veryclear about what we saw in terms of exacerbated competitive pricing activitythat clearly affected us and that we responded to. And you all know, we are notthe only one that was affected by that pricing behavior because there is reallyno free launch, so to speak, when you get into these kinds of things in themarket.

We continue to anticipate thatthere will be price erosion that has been the case in our industry steadilyyear-over-year. We intend to be better balanced than we had to be in the earlystages of this year. We intend to be better balanced around profit and growth.And you always run the risk that you have some slight impact on the top-linebecause it’s hard not to have that to be the case, a perfect example is managedservices. We could get a lot more growth. But obviously, we would have a prettysignificant impact on the gross margin line and that’s why I’ve said it’salways a matter of judgment and a matter of balance.

Operator

Thanks. Your next question isfrom Stuart Jeffrey from Lehman Brothers. Please go ahead.

Stuart Jeffrey - Lehman Brothers

Hi, thank you very much. I got aquestion also on the margin structure, maybe kind enough to give your grossmargin OpEx revenue and margin targets. And I guess, the concern externally isthe gross margin target given that everybody else in the industry struggling todo the high 30s.

So, I’m assuming the one thingyou can’t control is the OpEx revenue numbers. And so, if the market continuesto be very challenging and gross margins continue to be a problem. I was justtrying to get a feel for how much scope, you still feel there is for you to beable to reduce OpEx further without needing to start pruning away some of yourbusiness activities?

Michel Rahier

Yeah, of course it's right to seethat in an industry where the situation in pricing and confidence are high, youalso rely on the virtue of the company in terms of season marketing courses andyou rely on the support functions. But we are seeing is given the current levelof activities we have probably not envision so far in the merging plan as manyas reduction of cost and as we would have done.

Look at our earnings for thethree first quarters we have rate of OpEx, we have to say which are above 50%and it subsequently that in the industry, which is quite competitive this rateof OpEx to sales should get reduced by much lower than 30%. So, this is what weare seeing is the plan with the significant numbers of both of sales reductionsfrom to some 6 to some 7 to some 9. We believe that it will not hit ourbusiness. It will not harm our competitiveness. It will not prevent us fromvery being successful in all our market.

Operator

Our next question is fromAlexandre Peterc from Exane BNP Paribas. Please go ahead.

Alexandre Peterc - Exane BNP Paribas

Yes, hello. I would like to get aclarification on the quarter-on-quarter evolution by business area. At the timeof September warning, it seems that the wireless, particularly slowing down in North America. That was the main reason for the downgrade of expectations.

However, now looking at thequarter-on-quarter evolution; your [board] figures at constant effect. We seethat both wireless and wireline increased by the same amount and which lookssmall for wireline and looks quite significantly better than what I would thinkfor the wireless business, and so looking at really specifically at Wireline, Ican’t reconcile your positive comments on segments within Wireline, there isoptics, IP routing and so on even DSL with this more sequential growth. So,could you maybe make this a little bit clear for us?

And then the second questionwould be pertaining to what is going on at your major competitor. You’veprobably wants to what was going on at Ericsson and maybe you’ve some commentsto share with us on that subject in particular. Would you anticipate lesspricing pressure and less territory practices in the market on behalf of theWireless infrastructure leader. Is this part of your relative optimism on grossmargin restoration for the medium term? Thank you very much.

Jean-Pascal Beaufret

Alex, yeah, I believe that yourfirst question is about the geography in Wireless.

Alexandre Peterc - Exane BNP Paribas

Mostly.

Jean-Pascal Beaufret

So, what happened in theSeptember quarter basically it’s I think that what we can say is, we are inline with what we’ve said in the September announcement of this September 13thannouncement, we’ve seen in CDMA, a slight decrease in the sequential NorthAmerican revenues line more than compensated by the fact that CDMA worldwidewent 12 and what significantly up.

We have seen in GSM, a verysignificant up tick from the June quarter to the September quarter, which was aclear explanation of the ramp up in the core wireless sales. And it’s basicallythe momentum that we’ve signaled higher in the year; it means we’ve been inmomentum in the first quarter, in the second quarter, in our older backlog inGSM. That it answer your question.

Pat Russo

Yeah. Alexandre, I would said thesame thing. The wireless is just a matter of geographic mix and contracts wehad in GSM and CDMA outside of North America, because if you look at the North America numbers for the quarter, obviously thereare down certainly down year-to-year. With respect to your second questionabout anticipating some relief in price pressure, I would hope so.

Operator

Our next question is from line ofAndrew Griffin form Merrill Lynch. Please go ahead.

Andrew Griffin - Merrill Lynch

Thanks very much. I have questionabout the management changes, you announced today with reduction of the numberof business group and the regional structure change, how long will that take,still it’s down through the organization. Because I assume if people on the topare changing will also mean some of the teams will be changing underneath thatis well?

Pat Russo

The carrier group work started,what Michel six weeks ago and that’s.

Michel Rahier

End of August, yes.

Pat Russo

End of August and so that is progressingwell with respect to the regional changes. We will not do anything really otherthan Fréd Rose takes responsibility and Olivier Picard continues to support theEuropean and South region. And so there will really be no changes in that as weget through quarter, where we have a pretty significant ramp and then anythingthat we do going forward we would do as the year begins.

So in each of these cases, thetiming is dependent upon the circumstances and the rational pace that which wecan get these things done. Obviously, as quickly as we can, but we care for thebusiness, our customers and executing our plans.

Operator

Thank you. Our next question isfrom Phil Cusick from Bear Stearns. Please go ahead.

Phil Cusick - Bear Stearns

Hi, thanks for taking myquestion. If you can talk about the guidance on synergies, it seems likelong-term margins are pretty conservative. Do you feel like versus where youare a year ago in terms of giving guidance or you being more cautious this timearound given the lack of visibility over the last year versus the internal baseplan? And then has the visibility improved and neither the short or long-termfrom a year ago. Thanks.

Pat Russo

Let me answer your second partfirst has visibility improved from a year ago. We've been combined now for 11months. I think it's fair to say that as you bring the two companies together,as large and complex as ours of course you learn and see as you progress. So, Ithink the answer to that is absolutely yes.

With respect to the stakes thatwe are putting in the ground for long-term targets, we are, I don’t believe,we’re being overly cautious. We are trying to be realistic about the value ofthe actions we've so far identified. The expectation that we will continue tofind ways to be more efficient and a realization that this is an industrythat’s got an awful lot of change that we are going through. Our customers aregoing through. We are the suppliers are going through.

There are major technologicaltransitions that are occurring with this move to all IP, with the evolutionfrom 3G to 4G, and the competitive landscape from our customers is changing.So, based on everything we know that’s our current best view of the stakes thatwe are confident and comfortable and putting in the ground once we get throughthe merger period.

Operator

Thank you. Our next question isfrom Kulbinder Garcha from Credit Suisse. Please go ahead.

Kulbinder Garcha - Credit Suisse

Hi. Yes. And just a question on Iguess the difficulty how is the revenue visibility above in Q3 and withreduction you’ve just made to Q4. Are you mentioned in the past yourprofitability even an idea, what are the order books still about EUR 5 billionhigher or smaller, any indication there. And then just one very quick factualquestion, what is the expected cash restructuring now going to be over theperiod 2007 to ’09 is about EUR 2 billion, EUR 2.1 billion of cashrestructuring we should expect? Thanks

Jean-Pascal Beaufret

First of all could be in the cashrestructuring we have both from EUR 1.6 billion cash restructuring target forthe total ’07 or ’09 to EUR 2.1 with the additional plans that we are visioningthat we are executing on to-date. This is the answer number one for the ’07 or’09 period of time.

By the way you’ve seen that wehave cashed out for the time is being, 300 million and our plan will probablyexceeding the Q4 with a high, there will be high outlets in Q4. But we probablywill not exceed the target, which meet the targets that we have in ’07 cashoutlets in terms of restructuring.

There is another plan we are nowbuilding includes 2.1 billion total cash of restructuring. For the visibilityof Q4, we have backlog. The backlog will have increase at the end of ’07 bysignificant amount versus the end of ’06. So, we are relying. We are in ourforecast relying on a backlog numbers and then order book, which is stay in theoverview of sales.

Operator

Thank you. Our next question isfrom Simon Leopold from Morgan Keegan. Please go ahead.

Simon Leopold - Morgan Keegan

Thank you. This question is forPat. I wanted to see in terms of assessing the prospects going forward, if wewere able to go back and you have the situation of being able to changesomething at the beginning of this year to put us in a better position todaynine months later three quarters into year. What would you have donedifferently nine months ago, had you sort of been able to see what was going totranspire in the competitive landscape as well as the integration process?Thank you.

Pat Russo

Simon, your question presumes, Ihad -- when you say that if you were able to see what was going to transpire sothat itself, acknowledges the difficulty when you go through a merger andanticipating exactly what your competitors might do, and what's going on withrespect to customers.

I think in retrospect, we alwayslearn along the way. I think the one thing that if I, I mean, there is a lotsof things you always want to do differently. I think that knowing what I knownow and assessing the situation I think I would have moved to streamline andsimplify some of these aspects of our organization earlier in the year. And so,and perhaps to do over again, I’d, certainly that’s probably the area that Ipoint to.

Operator

Your next question is from RemiThomas from Cheuvreux. Please go ahead.

Remi Thomas - Cheuvreux

Thanks. Couple of questions, if Imay. The first one is to Michel. Michel, when I saw you a month ago youbasically told me that in all the product solutions, where you thought actuallysome was not able to differentiate itself enough. You would actually consider amake or buy strategy, when I actually look at the presentation today, itdoesn’t seem that is many products range always been the case. I get thefeeling it’s going to be the case maybe some of the software application andsome of the softswitches but anywhere else it doesn’t seem to be the case. Canyou elaborate it? And a question for Pat. I’m hearing that there still growingfrustration both among the salespeople as well as some of your clients asregard the organization, whereby the project management part of a wirelessproject is handled by the Alcatel-Lucent service organization.

I’m also hearing that you runninginto some technical issues with the regular network control that theWideband-CDMA RNC innovated from Nortel, which is affecting your performancesof some of your clients. Can you comment on that?

Michel Rahier

I will answer your first questionlet me. First of all, what you understood a month ago about willingness necessityto differentiate our public portfolio is absolutely embedded into the plan thatPat was outlining before.

So we are in different segmentsbeing Wideband-CDMA being NGN make ensure that the strength of Alcatel-Lucentin terms of happy transformations from both wireline customers and alsowireless customers going forward. That this strength, these strong pointsabsolutely leverage.

Examples of that what we aredoing in Wideband-CDMA around Femto Cells, around Femto BSR architecture, whichis an area, where definitely we are differentiated and positivelydifferentiated vis-à-vis a lot of our competitor. So we are reinforcing ourR&D in those areas.

If you are looking at NGN, we areputting stake in the ground, which we go through the IP/SIP service, which webelieve is the way to go for fixed service providers right now and mobileservice providers going forward.

So this differentiation aspect isabsolutely there. You were speaking about the willingness to work with 5% to gofor made by an analysis on a systematic basis, they are sure that the coststhat carries probably for UMTS is being done and there are many examples wherewe are working with third-parties in order to make sure that we are able toreinforce opportunities.

So, those elements are absolutelypart of the strategy outlined by -- but you mentioned also that in the secondpart of your questions that we would have difficulties with the, and seasons soon coming for the Nortel. I want to tell you very clearly, as part of planbefore that our strategy with regard to wideband CDMA is based on the commonproduct portfolio that which we are working and we are making big progress onthat.

The finalization of that plan isfor the third quarter of 2008. At that point in time the, converge portfoliowill be available on a worldwide basis and all the work is progressingaccording to plan. So, there are no special difficulties with regard to whatyou are saying at this point of time.

Pat Russo

And Remi actually one of theparts of your question had to do with frustration or the project managementfunction. I’ll tell you, there are many parts of the organization. Well, I hearnothing about this other than people are working and it’s working just fine.

I think, there are a few areaswhere there is either some lack of clarity about roles and responsibilities orfrankly somebody just doesn’t like the way it’s organized, which sometimehappens. So, it’s always important to distinguish is the frustration becausesomeone doesn’t like the way it is or is the frustration really legitimate.

So, we are working hard to makesure there is real clarity. I think this organizational alignment that we areproceeding with will help that. But for the vast majority of this set ofactivities, I’m not aware that there is any great frustration. People areworking pretty hard because we are going a lot to do this quarter.

Operator

Your next question is from PaulSagawa from Bernstein. Please go ahead.

Paul Sagawa - Bernstein

First, if you could talk a littlebit about the impact of currency not just on the top, when you talked about,but about margins how that flows through the bottom line since your costs areincurred all over the world as well. Also if you really quickly commentobviously Ericsson had to have difficult results in their quarter for moreunderstand they’re didn’t quite aggressive in bidding for contracts.

You noticed since their publiccomments are being perhaps more concentrating on the profitability of eachcontract, any difference in the way the bidding is happening on the streetright now, as suppose to say three months ago? Thank you.

Jean-Pascal Beaufret

About the currency impact on thetop line and in our margins, we giving for the top line quite fair amount ofdetails on the impact of the currency. Because we are giving top line atconstant Euro dollar rate, which means that we are anticipating all realslippages or movements between most of currencies, most of the practicalcurrency in which we are doing business.

So, I’m quite sure that in Eurosa decrease in dollar as a strong impact, of course, but we are connecting ourtop line on this element. On the margin, two levels of margin at operatingmargins level, normally there is almost no impact of currencies. Because we areeither naturally hedged or financially hedged.

So there should not be any majoroperating impact with the exception of the portion of those margins which aremade in Dollar, which should be slightly reduced, when translating in Euros.But which is these exceptions, which is small, there is no real impact ofcurrency operating margin.

In return on the other hand, atgross margin level, there is an impact of currency because if you are makingmost of your gross margin in products and businesses, which are denominatingwith their revenues and their cost of dollars then the translation of marginhas an impact. For example, this type of impact was in the Q3 '07 versus Q3 '06of the order of magnitude of 0.5 points. But on the other hand, we arerecording that in terms of cost. So, there is no major impact.

Pat Russo

In response to your questionabout we are seeing any difference post the announcement that Ericsson made.I’d say this isn’t specific to any one competitor. It’s just kind of generalanecdote in terms of how it feels. I would say, there is bit of easing that wemight be seeing. But make no mistake it continues to be very priced competitivein the industry that’s got a lot of price pressures. But there may be a slightbit of easing subsequent to the last couple of months.

Operator

Thank you. Our next question isfrom Francois Duhen from CM-CIC Securities. Please go ahead.

Francois Duhen - CM-CIC Securities

Hello. I’ve got in fact twoquestions. The first is one for Jean-PascalBeaufret. Could you maybe share with us the reason behind your decision toleave the company? My second question will talk about the headcount reductions,you mentioned that lot of people have now left the companies. When should weexpect to see that with a full aspect on that, on your margin, because I’veseen either time line always. As a sub-lines about reporting, should we seechange in reporting that I’d like to merge divisions and business unit? Thanks.

Jean-Pascal Beaufret

Okay, for the first question Iwould not comment too much, but just would like to say that, I have reallyspent with, I can tell you center few years which are the most thrilling yearsin my professional life time repeat, the rollercoaster is only always somethingeasy. So, it has been, there was a nice for very great pleasure for me to learnso much from this company.

So, and I would like as well asto say that I have been absolutely delighted to work on the, where to be, tootight to be instrumental. For the first and most important comes edition inthis industry. So, I believe that the merger was the right move and I’ve beenpleased it’s been part of that.

But I believe as well that in amerger it’s common place to a management team changing somewhere at some pointin time. So, the management which is put in place in the now by and we feel arethe right one to execute on the (inaudible). So, I am quite please with that.

Its easier to answer may be thequestion of reporting. The BUBD change will not change any type of reporting.While I report to carrier group and will have positive ability as well as theenterprise business segment and the service business segment.

And about the head count head ourtrends I believe that what counts at the end is clearly the impact in terms ofcosts, because head count is a proxy but not may be the best proxy in terms ofcosts. This is so even why we are giving you comparable cost which you do seereducing gradually and increasingly quarter over quarter from 2006 to 2007. So,you are seeing acceleration in the cost reduction, and this is what mattersmore than the number of hedge, which is impacted by some in sourcing contractsor some of the moves. It’s one of the metrics, which is not a metrics, whichcounts most. What counts most is the reduction of OpEx cost of someone year tothe other year.

Operator

Thank you. Your next question isKen Muth from Robert Baird. Please go ahead.

Ken Muth - Robert Baird

Hi, good morning. You talkedabout kind of new strategy in the IP and upgrades, kind of some of the thoughtson there. Will this be assuming that you would have a lot more products tolaunch in 2008 and if so kind of in what direction of the market segments?Thanks.

Jean-Pascal Beaufret

So, on your question, I confirmthat with the migration of wireless network towards IP, we see effectivelyquite a lot of traction and this is coming with new products that are going tobe launched from starting now and going on into 2008 and beyond. In fact, weare going to follow that quite similar approach and strategy as the one, we’vebeen, the execution around the IP transformation for fixed networks, we addtriple play service delivery architecture of Alcatel-Lucent was launched in2004 and has evolved significantly overtime with new products and new operatingsoftware [devices] being launched regularly three or four times a year.

So, we have in the BroadbandWorld Forum in Berlin at the beginning of October, we’ve started with this andjust as an example of this IP transformation of wireless networks coming allthe way from the core through the access parts, we are for instance,introducing IP in micro products.

So, more on the access part ofthe full wireless network the end-to-end dialers and wireless network that’s anexample of probably there are other ones like small service hub that areserving specifically the wireless customers. So, this mobile evolutiontransport architecture, this is which is a little bit the equivalent of theTPSDA for mobile is coming absolutely with a lot of new products.

And top of that we have lot offurther functionalities coming into all our wireless products. Pat was speakingabout EV-DO evolution, Voice-over-IP and the like that is coming on CDMA justas an example, this is bringing quite lot of new service, new features, newapplications that will be delivered in 2008 and beyond.

Operator

Thank you. And our last questioncomes from Nikos Theodosopoulos from UBS. Please go ahead.

Nikos Theodosopoulos - UBS

Yes. Thank you. I wanted tofollow up on a prior question and then just ask one more. There was a specificquestion on the book-to-bill in the third quarter. I don’t think it wasanswered if you can give some clarity on that? And then my question is out ofthe 4,000 new headcount reduction can you elaborate by main product area and/orgeography where these additional headcount reductions will come? Thank you.

Jean-Pascal Beaufret

So, (inaudible) we've said at theend of Q1 we’ve given at that time a number the new order intake into Marchquarter versus [set] in the March quarter. We did say so that we would not giveit again because it would not reflect necessarily the evolution of sales.

We did that in the March quarteryou remember that because we wanted to show you that after the merger issueweeks after the merger we had very quickly reconnected before markets andbefore customers in a way that made us believe that we would regain tractionsand regain from the low Q4 quarter in ’06.

Whether, we would give any detailor any specifics about the 4000 certainly not. We’ve not given that. We’ve notgiven that for the 12,500 plan. So, we won’t give that for the 4000. You waitand see that developing in certain action plans or a certain detail affectionplan. But certainly not by currency, which was fueled by business unit.

Pat Russo

Okay, that was the last question.Let me just take a minute and wrap up with just a couple of comments. We sharedthe plan of action that we put in place. I just want to reiterate that Ibelieve the choices we are making are the right ones. Given what we seehappening in the markets and I believe they will enable us to be the leader indelivering end-to-end solutions.

And so, while we are clearlypruning our portfolio and refocusing some of our R&D investment, we areremaining in the key segments that we believe are necessary for us to besuccessful and we will obviously improve the performance of all of thosebusinesses or any businesses that are underperforming and at the pace thatwhich we do that obviously will be as fast as we can.

I think that, when you thinkabout the evolution of networks, I believe that of all of our traditionalcompetitors, we have the strongest position in IP, which is foundational forhow networks are evolving. And I hope, you heard today from us and from Michelthat we’ve every intension of leveraging what we’ve done and what we’ve learnedin the wireline space into the mobile space.

The plan that we’ve advanced withrespect to how to improve the cost structure is one that we are committed to,and the team that, that I’ve identified is absolutely committed to executingthat and we believe as we move through the merger we can deliver a financialprofile that will have us in ranges that we indicated.

Before we close, I would justlike to acknowledge and thanks Jean-Pascal Beaufret. He is a terrificprofessional, who has done a yeoman’s job, as we move through the first phaseof this merger. Jean-Pascal will work with us on a transitional basis for thecoming couple of months. But I did wanted Jean-Pascal thank you and acknowledgeyou with this community in particular with whom you had relationships. Thanksfor your attention. And I look forward to talking with you after next quarter.

Operator

Thank you. Ladies and gentlemen,this conference will be available for replay and after 15 PM France time todaythrough midnight November 4.

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