Welcome to the Alcatel Lucent 2007 Second Quarter Earnings Release Conference Call. At this time all participants are on a listen-only mode. Later we will conduct a question and answer session instructions will be given at that time (Operator Instructions). And as a reminder this conference is being recorded. I would now like to turn the conference over to Pascal Bantegnie. Please go ahead.

Thank you, Mary. Hello to everyone and welcome to our second quarter 2007 earnings call. With me today on the call are Pat Russo, Alcatel Lucent Chief Executive Officer, Jean-Pascal Beaufret, Chief Financial Officer. Pat and Jean-Pascal will provide an overview for second quarter results and discuss the market and company’s outlook. Later in the call we’ll conduct a question and answer session. Please restrict yourself to one question please and no follow-up question. If anyone has not yet seen a copy of our earnings release or the slide presentation from the webcast of this call, which is available on our website at alcatellucent.com. Before we begin I’d like to remind you that certain statements we’ll be making today maybe considered forward-looking. Please refer to the Safe Harbour statements contain in today’s releases. At this point I’d like turn the call over to Pat.

Hello, everyone. Thank you for joining us today. We have some -- we seem to have technical issue here, we’re looking into. Okay, as you all now earlier today we announced our audited results for the second of quarter 2007. I’m just going to wait here for a minute until we find out what is happening technically. Okay, I’ll try to move ahead here. Before Jean-Pascal reviews the numbers in more detail, I’ll make some comments about the quarters result. As you all know, we are now halfway through the year and we have had two full quarters as a combined company. I would tell you we remain encouraged by the progress we are making in some key areas during the quarter, we’ll talk about those. Overall, while a few of our businesses were down year-to-year, most of our businesses grew in this quarter on a year-over-year basis. First, our Q2 revenues sequentially grew by a solid 13% at a constant exchange rate with the strongest performance seen in our wireline and our services businesses. From a regional perspective we saw a strong growth in Asia-Pacific. This revenue growth is a bit above what we said when our Q1 results were announced. I think the strength and the depth of our combined product portfolio, our ongoing communications with customers around our merged portfolio, and our plans for that has enabled us to continue to build some solid momentum in our order intake, which has contributed to revenue growth in the quarter. Secondly, we remained focused on executing on our integration plans and taking cost out of the business. During this quarter we saw some evidence of cost reductions out of our cost structure primarily coming from our IS/IT and R&D. It is clear to us that in area such as…

Thank you Pat. And first good afternoon and good morning everyone. I’m on chart nine adjusted P&L now. As in previous package this presentation will as you know refer Alcatel-Lucent results on an adjusted basis. Net of all purchaser price accounting increase is we believe that it provide, it provide to more meaningful and comparable basis for the evolution of our business performances. Preliminary the markets due to their demand when looking at the result this quarter and comparing them with last years performance Q2 adjusted result is a translation impact from the whole leverage from $126 for 1 euro average rate in Q2 ‘06 to 135 average rate in Q2 07, which obviously impacts those of all top line and of cost and expenses. For our revenues for the second quarter of 2007 were 426 million euro showing a very steady sequential growth of 13% of constant rate, 11% of an actual rate increases and 0.5% growth year-over-year at constant rate. As we’ll see in a moment when I discuss our business segment, we saw wireline and services were reported the strongest growth, while core networks and to lesser extent wireless revenues decreased at the time when we continue to make considerably investments in the next generation of this technology. As said by part of business in Asia Pac grew by over 20% year-over-year. Where adjusted gross profit of 33.4% of sales, represented margin decreased of 1 percentage point compared to the 34.3% margin, reported last quarter and a decrease of 4.7 points compared to the gross margin reported in a year ago period. Let me now focus on the analysis of the gross margin evolution on a quarterly sequential basis first. Our gross margin during the quarter includes a positive impact of 34 million or 0.5 points, from…

Yeah, thank you Jean-Pascal. Let me make a few comments about the outlook and then we will open up it for Q&A. As we stated in the press release today, we continue to anticipate sequential growth as the year progresses, we’re expecting a strong rate in the second half of the year, that based on the continued good order flow and the improving backlog obviously that implies a great deal of execution on our part in terms of delivering against customer orders but we are expecting a strong ramp in the second half of the year and as a result continue to expect that revenue will increase on a percentage basis in the range of the carrier market growth rate which we continue to believe is in the mid-single digits and obviously that is constant exchange rate. So, in summary, stepping back from all of this, we continue to believe that the positive long-term potential and benefits of the merger are strong with good growth potential. Our order pipeline is gaining momentum. Our integration plans are progressing. Not withstanding some newer initiatives we are managing that obviously effect gross margin, especially this quarter. We’re confident that our product rationalization or cost reduction efforts will lend themselves to improve financial performance in this area overtime. We are managing a large complex integration. In an industry that is not waiting for a merger to be completed and that obviously put some short-term pressure on the company as we work hard to build and enhance our customer relationships. Sure that we establish the kind of footprint that we want in areas for future growth and keep our eyes on our competitors and as well proceed with our integration. In the second half, we know we’ve got to continue to focus on building sales momentum with a sharpened focus on margin and work to continue to drive cost and expense out of the business all while keeping our customers happy. Our people are committed to do that and with that I’ll open it up for Q&A.

(Operator Instructions) Our first question is from the line of Alexandre Peterc from Exane BNP Paribas. Please go ahead.

This is Alexandre Peterc, Exane BNP Paribas. I would just like to clarify a few hints that you dropped into your press release. Your press release is pretending to the gross of margins. You seemed to be implying that there would be an improvement in yours margin as going forward. Now, I wondered if you could be a little bit more precise with what that going forward means. From what Jean-Pascal had said, it appears that maybe about 200 to 300 basis points of gross margin improvement could be expected in the coming quarters based on the -- or some other quarters indications has given. And then the second clarification would be related to the investment that you’re making on the growth margin level. The wording seems to imply that those investments would be primarily done in 2007, and then from 2008 on we could look at cleaner gains is in terms of cost cutting on your operating profit line. Is that a correct into prediction of what you are saying here? Thanks.

Yeah, Alexandre, I think to answer your two questions, which are basically, partly the same. First of all, do we provide any guidance on the improvement of the gross margin for the rest of the year by 200 or 300 points? The answer is no. We do not provide that. We are saying the gross margin in the June quarter was lower than we would have liked and was negatively impacted by a continued significant in key markets. By the way additional, if you remember what we said on May 11th, we said exactly the same. We said that we would to invest in special margin key markets what impacted as well as you know by an unfavorable product and geography mix and by the impact of some product transition cost as customers might had their network. We are facing, you remember, a quite fast transitioning and migration to IP based, IP structures, IP architectures where the pricing of that and the pressure of this market, provided for us to help and to support our customers in the cost of the solutions and installation. So we’re not providing any guidance for the gross margin. We are saying that we believe that the leverage this quarter is not indicative of what we do see in our business going forward. Then, could we hope with these investments -- could we hope that these investments will be one of or it would be our strong cost and will reduce a gross margin will improve? We’ve the cost cutting which we are making into regulation cut? Yes, yes. If we are tackling now big markets and develop countries as well as the emerging countries, it’s because the pricing pressure in these times is quite high and we are of course we will recover, we will catch up with this strong reduction in cost we do see in opponent. So the answer is of course, we should see these as non-anticipation of the hill margin we will ask further we focus productions.

Alexandre, let me just add to that without being specific with respect to numbers. But if you think about the early years of our integration that being this year, there are a couple of things that are happening; that with time we believe will change, right. So what are they; number one, we are going to customers and talking to them about the migration of our product portfolio and in some cases and by the way that happening now that’s likely not to happen as we go forward. Given where communicating all our plans, I would say more up front with respect to the merger and that result, as Jean-Pascal said, in us been willing to make some concessions. Secondly during the period of in the early days of the merger obviously, we have had some attacks on our customer base with offers per swapped out etcetera and we have concussively chosen to make sure that we maintained our customers. At the same time we have the wideband CDMA swaps that we have already talked about going on. So to your point about kind of ’07, ’08 etcetera, I think it is fair to say, there are a set of transitional activities that are occurring earlier on in the merger that we would -- than we would except to be occurring future points in time. So the reason we’ve said things the way we have is, we don’t believe this quarter’s margin is indicative of our opportunity going forward and as you also know we have not yet seen the benefit of all of the product rationalization and cost reduction work that affects the gross margin line as well.

Next question please.

Our next question is from line of Paul Sagawa from Bernstein, please go ahead.

I want to just -- the margin question that would be, I think on everyone’s mind since I think the negative case will be may not in favor, believe it but the only reason, the revenue line is accelerating is because we are making significant price concessions on the market price and that there is some permanent to the relatively weak margins you see. So, if you look back to where your margins were pre merger, sort of a basis. You’ve mentioned that some portion of your cost savings will be reinvested in terms of R&D etcetera. I think it’s reasonable to interpret your cost cut though as being, sometime once again pass this initial -- this initial flow of the specific integration cost, you would be able to deliver some reasonable amount of your cost cuts against those operating margins, yielding margins better than what you did prior merger otherwise you wouldn’t have had any real impetus for doing the merger in the first place. So I am hoping that you consider to firm a bit the ability you are expected ability to be able to deliver significant improvement to where margins were prior to the merger since margins obviously taking a dip to the worse in the last few quarters relative to where you were prior to the merger. And as you get a little touch, how quickly we might expect you to be able to deliver overall positive operating margins better than what you were prior to the merger. So high volume transition period that we really have to make our way through, I know you can’t be lack of perspective up to 2008 too much there.

Let me check or crack it that in Jean-Pascal jump into here. First of all, the theory of the case, of course is that the strength of the portfolio, we are mass in each of the key areas of the business will give us market position. That gives us some increasing leverage that the rationalization of the product portfolio will allow for a lower cost to support that portfolio and that affects, that affects many elements of the income statement including gross margin that the manufacturing rationalization between the two companies will allow for us to better utilize the capacity that both companies have and that the procurement savings that we are able to achieve in combination will in fact lend themselves to better pricing, better bargaining power with suppliers. We continue to believe all of those things are as we, as we work on the opportunities that we have. The unknown, the unknown element around gross margin, of course is what happens to price in the industry, so even before the merger we, both companies were constantly working to do product cost reduction, efficiency improvement to deal with price levels in certain aspects of the market that decline. But understanding that, the theory of the case and we absolutely believe that we are to be able together to produce better margins than we could separately and I would tell you without giving detail in one of our large business groups we believe we are going to see that this year. Okay, so we got a lot of things going on in this mix, but I have no reason to believe based on what I see that your thesis is not something that is available to us and we are working toward as we work on the 1.7 billion of synergies that we’ve talked about over the coming three years. Thank you. Jean-Pascal any -- you want to add to that.

Next please.

Our next question is from the line Tim Boddy from Goldman Sachs. Please go ahead.

Hi, yes, thanks. I'm afraid I'm going to keep going on the margin point because it seems very critical. When do you think you'll be comfortable to say the long term operating margin ambition, and if not now, if you could just articulate why not and under what conditions you could see more comfort in doing so? And, I guess a line to that. It feels as though the greater focus now on reinvesting in the business, and your market share, particularly in parts of the Wireless business in such that you could keep reinvesting for quite some time with the same rationale of reaching a sustainable market position and gaining better leverage of pricing, so what are the reasons why rationale is going to be now to invest as opposed to try and maximize profitability would change next year or the year ahead? Thanks very much.

Hi, Tim, to answer theme. First of all when do we give an enterprise model of more specifics on the any operating model? We said in June that we would we are in the condition here and we would first look at the way we are delivering which we has progressing well after than the last year by the way. But we would say before giving you more specific in the operating margin. We would like to really see this executed and flowing through or quarterly P&S into some, so I believe that we certainly will be ready to give more specifics very early into 2008 year.

Yeah, go ahead.

Then about reinvesting what would your question is basically why shouldn’t you – shouldn’t we continue and why as to reinvest always and what is the rationale of investing now. I would say two things. First of all a merger and the consolidation in the industry is an opportunity to reshuffle the market share and as the certainly for all customers to reconsider the way they are looking at their suppliers and their major solutions. Then they are aggressively going to an IP confirmation of the network. They want to mix it. They don’t want to mix it, so we are expressing today a bit of time more all that is resold and reconsidered by everybody. We cannot miss any major market share. So I would say that there are technology related opportunities and the rationale of technology related situation or circumstances and they are certainly a merger related circumstances in list I view of the pricing and of the solutions.

Yeah, and Tim I would just add to that because I think Jean-Pascal said it will and that said of circumstances in our case is highlighted by the triple integration of our YB -- wide band CDMA portfolio at a time when they are continue to be a number of frequent decisions being made around the world for movement to 3G. So we have a timing factor this year that is related to the customer decision cycle around the 3G technology and as you know at least we believe that being there and being in has a lot to say about your ability to migrate to what will become 4G and at the same time as Jean-Pascal said the merger-related aspects of this do create an opportunity not only for us to establish position with customers, but for customers in the near-term to be more proactive and aggressive. So I would not expect that as we move through this transition year, we would see the same level of quote unquote strategic investments.

Next question please.

Your next question is from the line of Tim Long from Banc of America. Please go ahead.

Thanks. Maybe I’ll put gears here little bit. You talk about some of the wins that you have able to pull cross by the merger of Alcatel and Lucent and all seem to be on the wireless side. Could you talk to us a little bit about any wins or opportunities that you see both on the IP Routing piece, any optical piece have you seen any of those yet? Are there any of those in the pipeline? Thank You.

Tim, the -- I am thinking a lot here because I can’t recall any large contracts we announced that were strictly Wireline, but there is many cases where the optical position that we have say for example the former Lucent CAD where we are pulling through now the IT product that was in the former Alcatel case. So we have obviously a more robust set up capabilities that we’re able to bring into customers. I’m just looking, yeah, China telecom is an example where we brought forward our IP service capability and along with some optical capability. So and there is a number of -- there is a number that we announced, but I can’t -- there is -- I can’t take out a specific big swing item but there is lots of contracts we’re announcing where we’re announcing optical along with IP or access along with IP under the triple -- under this triple play architecture. So we clearly see benefit on the Wireline side. And I think it’s evidenced by the way of the Wireline growth. We are seeing good growth in our Wireline business, good growth in our optical, good growth in IP, so we feel that that business is doing quite well.

Next question please.

We move to the line of Richard Windsor from Nomura. Please go ahead.

Hi, Thanks for taking my question. And what I would like to concentrate on is the profitability across your different divisions. I’m concerning from looking at when CDMA business was in Lucent and its profitability actually there the operating levels are actually very good. So what I’m kind of wondering is again when I look at the rest of your business which is progressed reasonably well during Q2 versus Q1. We are actually looking at the bulk of the problems and the bulk of the losses being mainly focused in GSM UMTS and is that really being underlined by again this large impairment that you took against that business?

Well, we won’t get to more specifics you know that we don’t disclose the ability in profit at the Business Group level but at the Carrier segment level. But I wouldn’t follow you the results in the Carrier Business are related to all the businesses. Take out well and which is progressing well and quite profitable, take out a lot of wireless businesses which are very profitable and the developing well and we see them increasing quite well in the year. We still have of course a significant amount on investments in those areas such as W-CDMA which are clearly impacting or profitability of top lines this is clear. And we do see in the conversations area what we are mentioning here with the margin and with R&D which is the pace of migration of all customers which are asking from us to help them and to support them migrating the core network architectures to IP clusters a lot. Clusters in margin and clusters in R&D, so it impacts clearly as well in the Carrier segment and the profitability.

In the case of GSM there which what I would add to that, you recall from our last call, we talked about the platform transition to the new 20RX which we will start to see the impact of in Q3 and Q4. So we are making a major change there in terms of that technology, its functionality, its feature richness as well as its cost profile.

Next please?

We move to the line of Phil Cusick from Bear Stearns. Please go head.

Hi. Thanks for taking my question. Now would you go the revenue guidance and the first half to second half guidance is fairly aggressive still. I know there hasn’t been a change. But I wondered if you could talk about what’s built into that guidance? Are we expecting a big ramp up from AT&T mobility on the second half? Or are there other things that are in particular going to be strong on the second half that may have been weak in the first? Thank you.

First of all, our guidance is based on the current outlook in the backlog. We’re seeing that the backlog overall is increasing. We are seeing continued growth in Wireline not particularly from one major customers. We’re seeing a major development in the fibre to the home in the second half which will certainly impact the Wireline revenue topline in the second half. We do see as well good course prospect in the GSM area and the W-CDMA area in wireless. We are based on a clear rump in those areas and the hunt is quite challenging by the way we’re maintaining, we’re guiding on a quite good course in the second half but its challenging in terms of volumes. And we see as well a ramp in the core architectures in converters so all across the board in the Carrier business group; we do see a significant course not to speak about services where we have shown in the June quarter a quite, quite good recovery. So it’s not based on a particular deployment in one customers I would say it’s quite well dispersed us quite over all lines of businesses and all customers.

And the only thing I would add to that as if you look at what’s going on in the market it’s pretty reflective of where the growth opportunities are in the market including around some of the emerging high growth countries.

Next question please?

We move to the line of Kulbinder Garcha from Credit Suisse. Please go ahead.

Yes, thank you. Just a question on a cost saving targets. I guess given that you are reinvesting probably in margins so and margins aren’t quite working our lease for this year, probably the fist half a little bit lower we expected. And if actually executional 30% of your headcount restriction today, why aren’t you raising your long term cost saving target and nothing looks very likely now given the, you done 30% of your headcount reduction in the first six month already and you are progressing quite well in the real estate and ISIT. So why aren’t those long term cost saving targets being revised outputs?

Well, because we are quite confused. We are achieving most of are fixed expenses savings for 2007 and then since we grow in 2008. In 2008, we have a better view of the cost model for company, the model of the company. We will be able to look at it from a three year period point of view.

Yes. I would just add. I think, we are two quarters into this. We feel good about the things we can point to that are indicative of the integration plans being on track in the reductions that we had planned for, gosh now almost a year ago, but it’s still relatively early. So, all I would add to that is, we are committed to driving as much cost and productivity out of and into the business, if you will, as this possible, but for now I think it’s probably most prudent to leave our long-term expectation as they are. While you now that we are going to work hard to overachieve.

Next question please.

We move to line of Stuart Jeffrey from Lehman Brothers. Please go ahead.

Hi there. Thank you. Quick question first one first go on the OpEx in terms of property expense evolution. Could you discuss whether or not you built currency into that and maybe for the comparable growth rates? What happened if you would did on a constant currency basis and perhaps also give us indication of what the full year 2006 number is so that we can perhaps make some other adjustments outsourced to see where the 2007 of fixed numbers might come out of?

OpEx, this is clearly a comparable matrix, which have detailed in the capital market. This is clearly based on a constant currency, because if you want to compare last year to this year you did take your account of the sharp decline of the euro dollar rate. So we are building in our comparable figures a constant currency of course. If the data is going down the portion of a cost fixed expenses expressing dollar would go down as well. So we can not take the benefit of that. We are at least state from the real currency decline was currency changes from one year to the other. Then your second part of your question is whether we could give a full year or six. So with time we are giving every quarter by the way it’s important to understand we do not preclude to refine these analysis. I said it in May 2007, we have given the first time a full year pro-forma earnings of the company for 2006 and we have modified that in May and we still in May said that we this is subject to further refinements and this is further definition. But this time we would add more clarity when the people are digging into the cost in to our organization today, looking backwards and what’s we were as a separate company in 2006 makes of course the view of that change or it will be. We give quarter after quarter and give it to small price leases more publicly as soon as we are further refinements, but we are speaking it not a big changes where we are speaking of refinements.

Next please?

Our next question comes from Ken Muth from Robert Baird. Please go ahead.

Hi. Could you tell me, do you expect the CDMA market to rebound in the second half ’07 or its stay around that current levels?

Ken, I wouldn’t use the term rebound associated with CDMA. CDMA from our standpoint as we’ve said is a large and relatively stable market. There are puts and takes around the world obviously the announcement we’ve made with Reliance in India indicates a strong commitment and continued growth in that part of the market. We’re seeing good take up on where they as more broadband services are get deployed on the other hand, as we noted today, we see some declines in Latin America and China. When the 3G licenses are issued in China there is obviously a potential for CDMA 3G to play a very positive role there and therefore we could see some growth. So large market, stable market, we continued to enjoy the global leading share position by a lot very profitable business for us and we think it positions us well for the growth that will occur as well as future transition that might occur as the technology moves a few years down the road.

Okay. Two more question please.

Thank you. We'll move to the line of Remi Thomas of Cheuvreux. Please go ahead.

Hi. Thank you couple of questions if I may? One on Wireless one on Wireline. On Wireless am I right in assuming that the bulk of the potential negative impact of the investments that you made in pricing over the first half in terms of new contract will actually come in the second half or maybe in early ’08 as those contracts actually start shipping. And therefore we should not be expecting the significant improvement in gross margin. And on Wireline, I am hearing that you guys are running into some tactical issues with your IP DSLAM at telecom in Telia’s French subsidiaries at each stake related to the fact that they don’t have your network management software and that they’re using Cisco routers. I was wondering if this issue was isolated or have you had the similar issue elsewhere at other clients where you are not providing an end-to-end solution?

Price margin Remi, you can effectively assume I am saying today that we are investing in developed and emerging markets is significant to amounts of a margin. I am saying so and I am saying that part of this is uphold cost, so you can assume that this uphold cost will not come back again over the last, by period of the 2007 year and ’08, because if this is for -- unless we are at investing in more market in other key areas we won’t absorbs uphold cost, but the fact is that, the margin will be of course in a first time, the margin will be lower, but we will catch up with a recovery in terms cost reduction into margins. So the profile, you can demit looking at the list of our customers which we have published, announced in the June quarter you can see what has been done just to invest in those markets and you can see of the margin quick evolve withstand. Although I am not -- I am clearly about your IP DSLAM questions. I am pretty sure that the network management software is very good and every customer should have to take their network by management software. But I am not completely aware of what you’re saying about these customers and the IP DSLAM platforms.

Yes. And let me -- we’ll be happy to follow up if there’s something specific we can have our folks talk with you about that just to recall what Jean-Pascal and I both said ant that is that now over 50% of the shipments are related to the IP, the IP DSLAM. So, that product is going quite well in the market, very well accepted by customers and we can follow up on this specific issue, but I am not aware of the problem that you noted.

Thank you. We’ll take one last question please?

Thank you. That comes from the line of Simon Leopold from Morgan Keegan. Please go ahead.

Thank you. I wanted to get a clarification and then a question I didn’t hear. In terms of clarifications there’s one word to look pass the restructuring impairment of asset charges in this quarter. I am coming up with earnings of five euro cents. I just want to confirm that that’s correct? And then in terms of the question, I understand the concept of re-investing savings, but I feel like it’s a blank check when we come to do our modelling. So if we could get a bit more explicit in terms of a sense of where you see your operating expenses, gross margin during this year that would be very helpful. Thank you.

Though, therefore we are prepared to give that to reduce that -- this kind of specifics after a period of time, after a year of transitions where we would like first to check and to see the path that we do savings or may and the market is evolving. It’s what we said that after a transition year we would give more specific on a model early to some eight. We won’t give it as a breakdown for expenses, type of expenses we are looking for going forward before certain time, you can understand that because we would like to execute on that. On the impairment charge and the net of the EPS per charge you have to take account of 13 cents net source 13, 14 cents less due to the impairment charge we are showing in our adjusted pro forma P&L. So let’s do the math, and let’s take out 13, 14 cents per share.

Well, let me just say, first of all I want to thank you for taking the time and I appreciate your obvious interesting good questions. I would just close by saying we spent a lot of time talking about gross margin, we’ve tried to give you a sense of what’s going on in the gross margin and try to suggest that we don’t believe this quarters level is indicative of the business going forward. And while we operate obviously in a competitive pricing environment. We have a lot of activities under way to focus on cost reductions and efficiency improvements. So, I know that there is a desire for more detail always, we try to give you directional statement about how we see the business and as Jean-Pascal said we’d expect to be able to provide a more specific financial profile for the coming couple of years as we come into 2008. So, thanks for your attention. Thanks for your interest and we’ll talk to you next quarter.

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