First Quarter 2000 Results: Record growth; Telecom sales up by 47% with strong improvement in operating profit

Outlook raised for full year Telecom sales growth to 30%

Paris. Alcatel today reported a 42% increase in sales to EUR 6,124 million for first quarter 2000, compared with EUR 4,319 million in the first quarter 1999, with Telecom sales growing by 47%. Income from operations improved significantly to a profit of EUR 113 million, compared with a loss of EUR 154 million in the corresponding period.

Net income amounted to EUR 258 million, representing a diluted EPS of EUR 1.31 ($0.25 per ADS). Serge Tchuruk, CEO, said, "Alcatel has posted record growth during the first quarter, with a strong performance across the board. We have significantly improved our profitability in this seasonally low quarter while maintaining a strong level of R&D investment to support new products to be rolled out in the next few quarters.

"With the trends we are seeing in our business and our strong order book, we believe that Alcatel can clearly go beyond the 2000 market growth, now estimated to be at 20%. We expect that our top line growth will be around 30% for the four Telecom segments, as opposed to mid-teens as was conveyed at the beginning of the year. We also believe that for the year 2000, we should meet our recurring target to grow Alcatel s operating income twice as fast as sales.

"We are optimistic about Alcatel s future. The first quarter has confirmed Alcatel s strong performance in fast Internet access solutions, where we are clearly the world leader. In wireline access we delivered over one million ADSL lines since the beginning of the year. Coupled with our growing success in next generation access nodes, Alcatel saw its sales grow by 80% in the U.S. In broadband wireless access, our LMDS solutions gained wide acceptance, opening the potential of a world market share similar to that of our ADSL. In mobile Internet access, our joint company will capitalize on Fujitsu s strong 3rd generation UMTS position with Japan s DoCoMo and on Alcatel s advanced product offering in GPRS and EDGE. Our business in optical networking has progressed considerably with Alcatel winning major contracts in DWDM backbones, optical cross connects and submarine networks. We now see our optical business approaching the EUR 7 billion mark at year-end, rewarding the substantial R&D investments which we continue to make in this fast growth area.

"With the projected IPO of our cable activity, Alcatel will become a pure telecom player highly focused on fast growth data centric business. Beyond access and optics, we are encouraged by the excellent market prospects for our next generation network offering, which will include the Newbridge portfolio when the transaction is complete. Also, we are confident that we have made the right choice in our enterprise focus on converged voice / data solutions and e-business."

First Quarter 2000 results (Unaudited)

First quarter net sales amounted to EUR 6,124 million, an increase of 41.8% over first quarter 99, with strong growth in all segments. Europe accounted for 57.3% of net sales, the U.S., Alcatel s largest single market, 19.5%, Asia 6.9%, and ROW 16.3%. Gross margin improved by over 2 points compared with first quarter 99. Selling, general and administrative ("SG&A") expenses in the first quarter 2000 decreased to 14.8% of revenues from 17.1% in first quarter 1999. R&D spending increased by EUR 160 million to EUR 648 million, representing 10.6% of sales, with continued focus in optical networking and data networking products for service providers.

Income from operations increased to a profit of EUR 113 million, compared with a loss of EUR 154 million in the 1999 corresponding period.

Income before taxes and amortization of goodwill amounted to EUR 460 million and included a capital gain of EUR 435 million, resulting from the disposal of financial assets. Net income amounted to EUR 258 million or a diluted EPS of EUR 1.31 ($0.25 per ADS) based on 197.03 million shares, compared with a loss of EUR 18 million in first quarter 99. Gearing was 15.3%, down from the 99 year end level of 19.5%

Networking

Revenue growth was strong across all divisions, increasing by 40%. The U.S. networking business continued to perform well with strong access (Litespan) volumes and steady switching sales. Alcatel s intelligent network solutions remained a key driver for the segment s growth, with major successes both in the U.S. and Europe registered during the first quarter. Sales of services, particularly in turnkey network design and build, continued to expand strongly. Driven by the increased use of the Internet and mobile phones, European operators are seeing a much higher level of traffic, creating a demand for more capacity in basic network equipment. Also, new applications such as "always-on-ISDN" are generating new demands.

Contrary to last year when carriers investment was significantly slowed down, sales for traditional switching equipment remained firm, while the need for an optimum migration to next generation networks was confirmed, in line with Alcatel s strategy. Cellular infrastructure sales also grew substantially in Europe, particularly in France and Germany, confirming the excellent quality of Alcatel s Evolium product range.

While still recording a seasonal loss for the first quarter, the segment s profitability has improved considerably over first quarter 99. This improvement is due to the strong volume growth, coupled with the benefits resulting from efficient cost cutting measures.

Internet and Optics

The segment posted record sales growth of 55%. Significant advances were made in the carrier data business, in particular DSL access in the U.S., with 736,000 ADSL lines delivered in the first quarter. Terrestrial transmission activity was boosted by strong cross connect sales and wins for optical networking systems with customers such as Deutsche Telecom and KPN Qwest. Submarine transmission continued its strong growth with work underway on SAC, Atlantica, Southern Cross and Flag Atlantic. The Space activity, which was down slightly over last year, continues to be impacted by a cyclical market. Excluding the Space activity, revenues increased by 79%.

The segment returned to profitability compared with a loss in first quarter 99 despite a continuing, intensive R&D effort in optical networking and data carrier products.

Enterprise and Consumer

Revenues, which were up 63%, increased significantly in all businesses, with a major contribution coming from continued strong PBX shipments resulting from the high order backlog at the end of last year. Genesys and the Internetworking division (mainly Xylan) are included in the first quarter (which was not the case last year), bringing a positive contribution to the segment, confirming the smooth integration of these acquisitions. The mobile phone activity also showed substantial strength with close to 5 million handsets sold in the first quarter; the outlook has been raised to more than 20 million handsets to be sold this year. Profitability was recorded compared with a loss in first quarter 99. Mobile phones led the improvement, due to volume increase, as well as the shift to in-house LAN products replacing OEM sales.

Telecom Components

Revenues grew considerably in all activities, increasing by 32%. Fiber optics remains the key growth driver both in Europe and the U.S., with sales doubling over first quarter 1999 to 2.2 million kilometers. This growth is being driven by the demand from public network operators who are building out their telephone networks. In addition, the LAN data cabling solutions for private operators also turned in a good performance. Benefiting from growth in the cellular infrastructure market, the high frequency radio component business grew significantly. Profitability increased substantially with close to a 3-point margin improvement, driven by increased volume, a sustained level of prices, and a high rate of capacity utilization.

Energy Cables

A strong 27% sales growth was registered with good performance in all businesses, confirming the rebound in European industrial trends, which had a positive effect on the equipment cable business which recorded a good increase in volume with stable prices. The metallurgy activity was in line with expectations, showing good growth in enameled wires in Europe. The Battery business recorded a strong rebound with a good performance in both industrial and portable batteries. Profitability improved considerably due to the beginning of a market upturn and the positive effect of a well-managed and efficient cost base.

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements relating to the Company s expectations for sales and profitability for 2000. Such expectations assume that (i) current market trends in sales will not change and operating profits will continue to improve (ii) the Company will benefit from growth in the telecommunications market, (iii) the Company s sales volume will increase in several product markets, (iv) improvement will continue to occur in under-performing businesses, and (v) customer spending patterns will not change. Actual results could differ materially from the above as a result of these or other factors.

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