Financial: Lucent Technologies Reports Record Earnings in 1999 Fiscal First Quarter — Net Income Up 26 Percent, Excluding One-Time Events — Revenues Outside The U.S. Increased 49 Percent - Company Financial Information

EDGE, On & About AT&T, Jan 25, 1999

Lucent Technologies Thursday reported that net income, excluding one-time events (see Note A), rose 26 percent to a record $1.414 billion or $1.05 a share(1) for its fiscal first quarter ended December 31, 1998. Revenues increased 6 percent to $9.204 billion. During the year-ago quarter, the company reported net income of $1.124 billion, excluding one-time events (see Note B), or 86 cents a share, and record revenues of $8.724 billion.

"Lucent begins fiscal 1999 with a solid quarter, with record earnings and margins," said Richard McGinn, chairman and chief executive officer. "As our customers continue to evolve and transform their networks for next-generation broadband communications and we add new customers around the world, Lucent's momentum has never been stronger," he said. "Some revenue Lucent had expected to recognize at the end of the first quarter was delayed into the second quarter," McGinn said. "However, customer demand remains robust and we continue to take share. In fact, Lucent has booked over $1 billion in revenues thus far in January, getting the fiscal second quarter off to a very fast start. "With strong customer demand, plus the revenues that were delayed, we expect a very good second quarter with revenue growth of about 30 percent from the year-ago quarter," McGinn stated. "Based on our current planning assumptions, we expect Lucent's earnings per share to double from the 14 cents we reported a year ago," McGinn said.(2) "For the year, we believe we can achieve top line growth of 19 percent to 20 percent and EPS growth of about 35 percent," McGinn added. He noted that this EPS growth would exclude one-time events. "Our announced merger agreements with Ascend Communications, a leader in service provider data networking, and Kenan Systems, the premier billing software company, will help to provide additional momentum in 1999 and further establish Lucent as the clear leader in end-to-end communications networking," explained McGinn. For the fiscal first quarter, including a $1.308 billion (96 cents a share) one-time gain due to a change in the company's pension and post- retirement benefit accounting and a one-time, after-tax charge of $14 million (1 cent a share) for in-process research and development associated with the acquisition of Quadritek (see note A), the company reported net income of $2.708 billion, or $2.00 a share. Results for the quarter include $65 million in net income (or 5 cents a share) as a result of a change in the company's pension and post-retirement accounting, as well as other benefit provisions. In the year ago quarter, the company reported net income of $792 million, or 61 cents a share, including a one-time charge associated with the acquisition of Livingston Enterprises and a one-time gain associated with the sale of the company's Advanced Technology Systems business (ATS) (see note B). For the calendar year ended December 31, 1998, net income rose 45 percent to $2.577 billion or $1.92 a share, excluding one-time events. Revenues increased 13 percent to $30.627 billion. This compares with net income of $1.772 billion or $1.37 a share, excluding one-time events, and revenues of $27.146 billion in calendar 1997 on a reported basis. Review of Operations - Three Months Ended December 31, 1998 For the quarter, revenues for systems for network operators increased 3 percent to $6.115 billion, revenues for business communications systems increased 2 percent to $1.975 billion, and revenues for microelectronic products increased 6 percent to $821 million. SYSTEMS FOR NETWORK OPERATORS Revenues increased by 3 percent over the year-ago quarter to a record $6.115 billion, driven by sales of switching systems with associated software, optical networking systems, data networking systems for service providers, and services. Revenues were led by sales to U.S. and international service providers, including RBOCs (Regional Bell Operating Companies), competitive local exchange carriers, and long distance carriers. Continued demand for data services and Internet access in businesses and residences contributed to the group's quarterly revenues. Revenues outside the U.S. increased a record 67 percent and represented approximately 42 percent of the group's revenues for the quarter. Within the U.S., revenues decreased 19 percent from the year-ago quarter. The primary reason for the quarterly decline was the delay of revenues into the second quarter. Another factor was an exceptionally strong comparative quarter in fiscal 1998, when Lucent benefited from more than $1 billion in revenues associated with PCS wireless buildouts. For the calendar year, revenues increased 14 percent to $18.924 billion. BUSINESS COMMUNICATIONS SYSTEMS With the reduction of seasonality in this business, revenues increased 2 percent to $1.975 billion compared to the year-ago quarter. Revenues were led by sales of Definity enterprise communication servers -- including those with call center applications -- messaging systems and enterprise data networking systems. Within the U.S., revenues increased by about 3 percent over the year-ago quarter. Revenues outside the U.S. decreased about 2 percent and represented approximately 18 percent of the group's revenues for the quarter. For the calendar year 1998, revenues grew 23 percent to $8.138 billion. MICROELECTRONIC PRODUCTS Revenues increased 6 percent over the year-ago quarter to $821 million, driven by sales of chips for high-speed communications, mass storage and data networking. Sales of optoelectronic components also increased significantly. These increases were offset by decreased sales of power systems. Lucent's core semiconductor business grew 18 percent. Within the U.S., revenues decreased about 8 percent over the year-ago quarter. Revenues outside the U.S. increased about 20 percent and represented approximately 55 percent of the group's revenues. For the calendar year, revenues rose 7 percent to $3.073 billion. "With 18 percent revenue growth in the quarter, Lucent is one of the fastest growing companies in the chip industry," said McGinn. "Lucent's focus on communications-related semiconductors has enabled us to outperform the chip industry during a difficult period." Revenues from Other Systems and Products increased to $293 million due primarily to the consolidation of the businesses regained from the PCC venture. COSTS AND EXPENSES As a percentage of revenue, gross margin for the quarter improved to 52.3 percent from 48.2 percent in the year-ago quarter, reflecting a more favorable mix of products -- software, optical and data networking -- as well as the improved performance of multi-year contracts. Selling, general and administrative expenses (SG&A) accounted for 19.3 percent of revenues in the quarter, compared to 17.8 percent in the period a year-ago. Excluding one-time acquisition charges, as a percentage of revenue, research and development spending for the quarter increased to 10.1 percent from 9.5 percent during the 1998 period, due to investments in high growth areas such as wireless, data networking, and optical networking, as well as switching and access systems. Excluding one-time charges and gains, net income for the quarter was driven primarily by revenue growth, higher gross margins, and a decrease in the company's effective tax rate to 34 percent, compared to 36 percent in the year-ago quarter. Lucent Technologies, headquartered in Murray Hill, N.J., designs, builds and delivers a wide range of public and private networks, communications systems and software, data networking systems, business telephone systems and microelectronic components. Bell Labs is the research and development arm for the company. FMI: http://www.lucent.com. (1) All earnings per share reported in this release are Diluted EPS andreflect the effect of a two-for-one stock split effectiveApril 1, 1998. (2) The 14 cents earnings per share in the second quarter of fiscal 1998 excludes $157 million after-tax or 12 cents a share in one-time in- process R&D charges associated with the acquisition of Prominet.