Alcatel Shares Fall After 4th Quarter Results

For full year 2004, sales amounted to Euro 12,265 million, a 5.7% increase compared to 2003. At a constant exchange rate, yearly sales increased by 9.5%. The gross margin for full year 2004 was 37.3%. Income from operations was registered at Euro 978 million, an 8.0% return on sales. Net income pre goodwill amounted to Euro 689 million or diluted Euro 0.51 per share (USD 0.68 per ADS) and net income after goodwill amounted to Euro 281 million or diluted Euro 0.21 per share (USD 0.28 per ADS).

Serge Tchuruk, Chairman and CEO, summarized the Board’s observations:

“2004 has been characterized by a strong turnaround at Alcatel in both sales and profits. While carrier markets showed a modest recovery, Alcatel’s sales increased by close to 10% at a constant Euro/USD exchange rate. In spite of very competitive market conditions our operating income came close to the one billion Euro mark, which is twice last year’s performance. A positive free cash flow has been registered in both the fourth quarter and full year, even after financing restructuring programs.

We are confident that Alcatel is on the right track. We have maintained an aggressive strategy in developing or acquiring disruptive technologies, like the mobile NGN from Spatial Wireless, and are now getting the benefits of our applications and solutions approach. We are quite encouraged by the 50% revenue increase in 2004 in fixed/mobile applications and by major successes in end-to-end solutions integration such as triple play.

An aggressive strategy has also been followed in establishing footprints in certain high potential markets of the emerging world, accepting temporary losses as an investment for future growth. The gross margin of the fourth quarter was particularly impacted but we nevertheless reached our goal of a double digit operating margin in that quarter under adverse currency conditions.

We will maintain our strategic direction in 2005, closely monitoring our operations in order to reach our priority target, which is a 10% operating margin. In that regard, even if market conditions are likely to stay very competitive, we are confident that the required selective commercial strategy will leave room for revenue growth, given the positioning of our product offering and our momentum in the market place. Considering this operating margin target and the 5% reduction expected in comparable fixed expenses, we will maintain some flexibility in the gross margin, permitting investment in new markets or new technologies as required. After the execution of reserved restructuring plans, new restructuring costs are now expected to be brought down to about 1% of sales in 2005 and to be entirely financed by capital gains.

In terms of business trends, we expect a positive inflection in fixed communications by mid-year, with our sales fuelled by the triple play momentum, a continuation of our growth in mobile communications, due to our good positioning in emerging markets, and significant progress to be achieved in vertical markets for our private communications group”.

Outlook