Form 10-Q for LUCENT TECHNOLOGIES INC
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4-Aug-2005
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report, including the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance and the industries in which we operate as well as on our management's assumptions. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties include: fluctuations in the telecommunications market; our ability to compete effectively; our product portfolio and ability to keep pace with technological advances in our industry; our reliance on a limited number of key customers; our exposure to the credit risk of our customers; the pricing, cost and other risks inherent in our long-term sales agreements; the costs and risks associated with our pension and postretirement benefit obligations; the social, political and economic risks of our foreign operations; our reliance on a limited number of third parties to manufacture most of our products; our ability to generate positive cash flow; existing and future litigation; our ability to protect our intellectual property rights and the expenses we may incur in defending such rights; the complexity of our products; changes to existing regulations or technical standards; compliance with environmental health and safety laws; and our ability to retain and recruit key personnel. For a more complete list and description of such risks and uncertainties, refer to our Form 10-K for the year ended September 30, 2004. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this quarterly report, whether as a result of new information, future events, changes in assumptions or otherwise.
EXECUTIVE SUMMARY
We design and deliver the systems, software and services that drive next generation communications networks. Supported by Bell Labs research and development, we use our strengths in mobility, optical, access, data and voice networking technologies, as well as services, to create new revenue-generating opportunities for our customers, while enabling them to quickly deploy and better manage their networks. Our customer base includes communications service providers, governments and enterprises worldwide.
There has been some consolidation among service providers as they look to expand their scope and scale while improving cost efficiencies. This industry dynamic presents both challenges and opportunities for equipment vendors. One potential challenge may come in the form of rationalized capital spending in the future. However, we anticipate that there will also be opportunities, as carriers will require assistance integrating these large, complex networks. Also, depending on the service providers involved, some of the consolidation could enable certain vendors to extend their reach into customers that were previously focused on different technologies or areas.
The telecom market remains dynamic. We are at the beginning of a fundamental shift not only in the way networks operate, but also in the way end users are accessing and using those networks. As this transformation progresses, our customers are increasingly focused on deploying new IP-based, revenue generating services that will differentiate their businesses and build customer loyalty. However, the actual trialing, testing and deployment of these new technologies will take time. This is a long-term technology transition, which creates opportunities for us and our customers in growth areas such as mobile high-speed data, broadband access, metro optical networking and Voice over Internet Protocol (or VoIP) solutions, as well as professional and managed services. We are working to turn these technologies and opportunities into cost-effective offers for our customers.
Within this environment, certain service providers are currently investing to meet growing capacity demands. These demands are being driven by the coverage requirements, subscriber growth and traffic increases that place demands on networks of all kinds. In addition, service providers have increased investments in the systems, software and technologies that enable next-generation services that cut across wireline and wireless,
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19 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
as well as voice, video and data. There is also a growing interest in content - games, music and entertainment. To effectively compete, we have to continue our work to expand our customer base, improve overall productivity and efficiency and provide new solutions to customers.
To meet these challenges, we have been adapting our product portfolio around a common IP Multi-Media Subsystem ("IMS") based platform that gives our customers the flexibility to build the types of networks and offer the types of services to best meet the demand for converged broadband services. We continue to progress in combining our mobility and wireline businesses into a single unit called the Network Solutions Group. We expect this change to:
† More efficiently deliver a common set of IMS-based solutions to our customers that will help them expand their revenue bases.
† Improve our speed and time to market by streamlining supply and design chains and shortening our product development cycles.
† Further simplify our operations through increased standardization of processes and platforms.
† Further reduce our cost and expense structure by eliminating redundancies across all parts of the company, including support functions and other areas.
† And lastly, assure that we maximize the leverage of our complete breadth of offers, for example, providing optical back-haul solutions to our mobile customers.
We expect to achieve operating efficiencies as a result of these efforts. These changes will allow us to more effectively focus our efforts and resources on pursuing high-growth areas where we have strong technology, market or customer advantages. We believe that focusing on these areas will allow us to better serve our customers and provide us with the best opportunity to profitably grow the business.
Capital spending in our target markets can change rapidly and can vary over short periods of time. As a result of this uncertainty, it is difficult to make accurate forecasts of near- and long-term results and cash flow. In addition, because a limited number of customers account for a significant amount of our revenue, our results are subject to fluctuation due to changes in spending by one or more of these customers. Exposure to this type of fluctuation is most prevalent in our Mobility segment.
The following table includes certain financial information.
Three months ended June 30, Nine months ended June 30,
(in millions) 2005 2004 change 2005 2004 change
--------- -------- --------- --------
Mobility $ 1,172 $ 1,028 14 % $ 3,526 $ 2,961 19 %
INS 592 673 (12 %) 1,826 2,178 (16 %)
Services 538 473 14 % 1,557 1,418 10 %
Patent Licensing 31 - - 73 44 66 %
Other 7 16 (56 %) 28 42 (33 %)
--------- -------- --------- --------
Revenues $ 2,340 $ 2,190 7 % $ 7,010 $ 6,643 6 %
--------- -------- --------- --------
Gross margin $ 1,052 $ 947 $ 105 $ 3,011 $ 2,804 $ 207
Gross margin rate 45 % 43 % 2 points 43 % 42 % 1 point
--------- -------- --------- --------
Operating expenses $ 681 $ 598 $ 83 $ 2,053 $ 1,869 $ 184
Percentage of revenue 29 % 27 % 2 points 29 % 28 % 1 point
--------- -------- --------- --------
Operating income $ 371 $ 349 $ 22 $ 958 $ 935 $ 23
Other income, net 52 128 49 35
Interest expense 85 94 259 304
Income taxes (34 ) (4 ) (65 ) (127 )
--------- -------- --------- --------
Net income $ 372 $ 387 $ 813 $ 793
--------- -------- --------- --------
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4-Aug-2005
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report, including the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance and the industries in which we operate as well as on our management's assumptions. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties include: fluctuations in the telecommunications market; our ability to compete effectively; our product portfolio and ability to keep pace with technological advances in our industry; our reliance on a limited number of key customers; our exposure to the credit risk of our customers; the pricing, cost and other risks inherent in our long-term sales agreements; the costs and risks associated with our pension and postretirement benefit obligations; the social, political and economic risks of our foreign operations; our reliance on a limited number of third parties to manufacture most of our products; our ability to generate positive cash flow; existing and future litigation; our ability to protect our intellectual property rights and the expenses we may incur in defending such rights; the complexity of our products; changes to existing regulations or technical standards; compliance with environmental health and safety laws; and our ability to retain and recruit key personnel. For a more complete list and description of such risks and uncertainties, refer to our Form 10-K for the year ended September 30, 2004. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this quarterly report, whether as a result of new information, future events, changes in assumptions or otherwise.
EXECUTIVE SUMMARY
We design and deliver the systems, software and services that drive next generation communications networks. Supported by Bell Labs research and development, we use our strengths in mobility, optical, access, data and voice networking technologies, as well as services, to create new revenue-generating opportunities for our customers, while enabling them to quickly deploy and better manage their networks. Our customer base includes communications service providers, governments and enterprises worldwide.
There has been some consolidation among service providers as they look to expand their scope and scale while improving cost efficiencies. This industry dynamic presents both challenges and opportunities for equipment vendors. One potential challenge may come in the form of rationalized capital spending in the future. However, we anticipate that there will also be opportunities, as carriers will require assistance integrating these large, complex networks. Also, depending on the service providers involved, some of the consolidation could enable certain vendors to extend their reach into customers that were previously focused on different technologies or areas.
The telecom market remains dynamic. We are at the beginning of a fundamental shift not only in the way networks operate, but also in the way end users are accessing and using those networks. As this transformation progresses, our customers are increasingly focused on deploying new IP-based, revenue generating services that will differentiate their businesses and build customer loyalty. However, the actual trialing, testing and deployment of these new technologies will take time. This is a long-term technology transition, which creates opportunities for us and our customers in growth areas such as mobile high-speed data, broadband access, metro optical networking and Voice over Internet Protocol (or VoIP) solutions, as well as professional and managed services. We are working to turn these technologies and opportunities into cost-effective offers for our customers.
Within this environment, certain service providers are currently investing to meet growing capacity demands. These demands are being driven by the coverage requirements, subscriber growth and traffic increases that place demands on networks of all kinds. In addition, service providers have increased investments in the systems, software and technologies that enable next-generation services that cut across wireline and wireless,
--------------------------------------------------------------------------------
19 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
as well as voice, video and data. There is also a growing interest in content - games, music and entertainment. To effectively compete, we have to continue our work to expand our customer base, improve overall productivity and efficiency and provide new solutions to customers.
To meet these challenges, we have been adapting our product portfolio around a common IP Multi-Media Subsystem ("IMS") based platform that gives our customers the flexibility to build the types of networks and offer the types of services to best meet the demand for converged broadband services. We continue to progress in combining our mobility and wireline businesses into a single unit called the Network Solutions Group. We expect this change to:
† More efficiently deliver a common set of IMS-based solutions to our customers that will help them expand their revenue bases.
† Improve our speed and time to market by streamlining supply and design chains and shortening our product development cycles.
† Further simplify our operations through increased standardization of processes and platforms.
† Further reduce our cost and expense structure by eliminating redundancies across all parts of the company, including support functions and other areas.
† And lastly, assure that we maximize the leverage of our complete breadth of offers, for example, providing optical back-haul solutions to our mobile customers.
We expect to achieve operating efficiencies as a result of these efforts. These changes will allow us to more effectively focus our efforts and resources on pursuing high-growth areas where we have strong technology, market or customer advantages. We believe that focusing on these areas will allow us to better serve our customers and provide us with the best opportunity to profitably grow the business.
Capital spending in our target markets can change rapidly and can vary over short periods of time. As a result of this uncertainty, it is difficult to make accurate forecasts of near- and long-term results and cash flow. In addition, because a limited number of customers account for a significant amount of our revenue, our results are subject to fluctuation due to changes in spending by one or more of these customers. Exposure to this type of fluctuation is most prevalent in our Mobility segment.
The following table includes certain financial information.
Three months ended June 30, Nine months ended June 30,
(in millions) 2005 2004 change 2005 2004 change
--------- -------- --------- --------
Mobility $ 1,172 $ 1,028 14 % $ 3,526 $ 2,961 19 %
INS 592 673 (12 %) 1,826 2,178 (16 %)
Services 538 473 14 % 1,557 1,418 10 %
Patent Licensing 31 - - 73 44 66 %
Other 7 16 (56 %) 28 42 (33 %)
--------- -------- --------- --------
Revenues $ 2,340 $ 2,190 7 % $ 7,010 $ 6,643 6 %
--------- -------- --------- --------
Gross margin $ 1,052 $ 947 $ 105 $ 3,011 $ 2,804 $ 207
Gross margin rate 45 % 43 % 2 points 43 % 42 % 1 point
--------- -------- --------- --------
Operating expenses $ 681 $ 598 $ 83 $ 2,053 $ 1,869 $ 184
Percentage of revenue 29 % 27 % 2 points 29 % 28 % 1 point
--------- -------- --------- --------
Operating income $ 371 $ 349 $ 22 $ 958 $ 935 $ 23
Other income, net 52 128 49 35
Interest expense 85 94 259 304
Income taxes (34 ) (4 ) (65 ) (127 )
--------- -------- --------- --------
Net income $ 372 $ 387 $ 813 $ 793
--------- -------- --------- --------
ـــــــــــيل بس الخبر يعني بيرتفع السهم او بينزل عشان انا ماعرف انجليزي 