Lucent Technologies Reports Third Fiscal Quarter Results

Murray Hill, NJ. Lucent Technologies (NYSE: LU) today said that pro forma earnings per share from continuing operations(a) rose 30 percent to 30 cents a share, or $1.007 billion, for its third fiscal quarter ended June 30, 2000. This compares with 23 cents a share, or $732 million, in the year-ago quarter. Pro forma revenues from continuing operations increased 20 percent to $8.713 billion versus $7.245 billion a year ago.

In a separate news release, the company announced plans to spin off its $4 billion microelectronics business, which includes the optoelectronics components and integrated circuits (IC) divisions. The company is planning an Initial Public Offering (IPO) for up to 20 percent of the new company in the first calendar quarter of 2001, with the remaining shares expected to be spun off in a tax-free distribution by next summer.

"We ve completed the quarter with strong growth in our data networking, wireless, professional services, optoelectronics and optical fiber businesses," said Richard McGinn, Lucent Technologies chairman and chief executive officer. "With today s announcement of our spinoff of the microelectronics business, we will create two vibrant new companies positioned to lead in the Internet infrastructure and communications semiconductor markets. The fact is, we are dividing Lucent in order to accelerate growth.

"The communications components business will now be given the opportunity to achieve its full potential as it becomes freed from the strategic conflict it faced as part of Lucent," continued McGinn. "And, Lucent will now be totally focused on the largest network buildout in history, a $225 billion market opportunity this year. With a more focused Lucent, we will be able to streamline our operations, increase investments in the market for broadband and wireless Internet infrastructure, and deliver strong, consistent growth."

On an as reported basis, revenue from continuing operations increased about 18 percent to $8.713 billion this quarter compared to $7.403 billion in the year-ago quarter. After including charges of $863 million for purchased in-process research and development related to recent acquisitions, $118 million amortization of goodwill and acquired technology, and a $287 million net loss from discontinued operations, Lucent s as reported results for the quarter were a net loss of $301 million, or 9 cent loss per share, compared with net income of $763 million, or 24 cents per share, in the year-ago quarter.

Sets Expectations for Fourth Fiscal Quarter 2000 and Fiscal 2001

McGinn said Lucent expects that pro forma revenues from continuing operations will grow about 15 percent for the fourth fiscal quarter of 2000, which ends Sept. 30, and pro forma earnings per share from continuing operations will be roughly in line with revenue growth. For fiscal year 2001, the company said it expects to return to 20 percent revenue growth and 20 percent growth in pro forma earnings per share.

The fourth quarter expectations reflect product transition issues associated with a faster-than-expected decline in circuit switching sales, which is not expected to be offset as quickly by the ramp-up of newer products; a longer-than-expected, full-volume ramp-up in optical networking; and the substantial reduction of a major long-term foreign project.

While the company expects revenues from continuing operations to grow 20 percent in the first fiscal quarter of 2001, it anticipates a 15 percent decline in pro forma earnings per share for the same period. This is due to a major shift from higher margin switching products to newer products with initially lower margins associated with the ramp-up of new technology. Dilution from the acquisitions of Chromatis and Ortel is also expected to impact bottom line results for the quarter. The company expects to see these factors offset in the following quarters as Lucent hits full volume production and executes on its product cost reduction plan. "We see our way clearly to 20 percent top line and bottom line growth for fiscal 2001," said Deborah Hopkins, Lucent Technologies executive vice president and chief financial officer. "The market opportunities are vast, and so too are the opportunities to sharpen our execution, reduce the operations that were built for a more complex company and increase our efficiencies in the way we go to market. All of this gives us the chance to create more leverage to the bottom line."

REVIEW OF OPERATIONS

Service Provider Networks

Revenues increased by 16 percent over the year-ago quarter to $6.885 billion, driven by sales of service provider Internet infrastructure, wireless networks and professional services. Despite tripling manufacturing capacity in OC-192 optical systems since January and seeing strong customer acceptance, the ramp-up to full volume will be spread over the next two quarters. Revenues were led by sales to wireless service providers, competitive local exchange carriers and incumbent local exchange carriers.

Within the U.S., revenues increased 21 percent over the year-ago quarter. Revenues outside the U.S. represented approximately 27 percent of total service provider revenues and increased about 4 percent as sales growth was impacted by the substantial reduction of one major long-term foreign project. Excluding the impact for this contract, growth outside the U.S. would have been 22 percent.

Since the end of the second fiscal quarter, the Service Provider Networks group: · Announced agreements for up to $3 billion from a wide range of broadband, wireless and optical networking projects. · Agreed with IBM, EMC and Sun Microsystems to address the emerging class of high-bandwidth service providers called cybercarriers. Along with these companies, Lucent will offer cybercarriers its professional services and networking expertise to help integrate high-speed networking with new data centers that provide Web-hosting, e-mail, e-commerce and data storage services. · Agreed with Oracle Corporation to develop and market what will be the industry s most comprehensive customer relationship management and billing software solution. · Acquired Chromatis Networks, a leader in metro optical networking systems, one of the fastest growing segments of the optical networking market. · Was cited as the market leader in digital subscriber line (DSL), voice over Internet protocol (VoIP), remote access and wide area network (WAN) switching markets for the first calendar quarter of 2000, according to leading industry analyst firms.

Microelectronics & Communications Technologies

Revenues increased by 39 percent over the year-ago quarter to $1.809 billion, reflecting almost triple-digit growth in optoelectronic components and increased sales of optical fiber, power systems and customized chips for high-speed communications and data networking systems. Within the U.S., revenues increased about 49 percent over the year-ago quarter. Revenues outside the U.S. increased about 26 percent and represented approximately 40 percent of revenues.

Since the end of the second fiscal quarter, the Microelectronics and Communications Technologies Group: · Acquired Herrmann Technology, a leading supplier of devices for next-generation DWDM optical networks. The acquisition strengthens Microelectronics ability to deliver highly integrated, cost-effective optoelectronic component solutions. · Announced a $40 million expansion of its optoelectronic manufacturing capacity in Southern California related to the recently acquired Ortel Corporation. · Unveiled the world s highest performing digital signal processor (DSP) system-on-a-chip family for next-generation Internet and wireless networks. It will double the Internet chip capacity and offer more than four times the voice and data channels per chip for wireless switches, VoIP gateways and remote access servers. · Announced that it is seeking to sell its Power Systems business, a leading supplier of power products for the telecommunications and computer industries, as part of Lucent s effort to focus on Internet infrastructure.

DISCONTINUED OPERATIONS

By the end of September, Lucent Technologies expects to complete the spinoff of its enterprise networks business and so has accounted for the financial results of that business as discontinued operations. The results from discontinued operations and other charges associated with the spinoff for the quarter was a net loss of $287 million. The net loss is composed of income from those operations for the third quarter, the estimated costs directly associated with the disposition and an estimated business restructuring charge partially offset by the estimated net earnings of the enterprise networks business through the planned spin date of Sept. 30, 2000. This charge does not include additional restructuring projects, which are still being developed.

Lucent s financial information for discontinued operations will differ from the information reported by the enterprise networks business because of different assumptions and allocations required to be made by the two companies.

COST AND EXPENSES

As a percentage of pro forma revenue for continuing operations, gross margin was 43.5 percent compared with 48.3 percent in the year-ago quarter, reflecting a shift in product mix and the increased costs associated with the ramp-up of new products.

Selling, general and administrative expenses (SG&A), excluding one-time events and goodwill and acquired technology amortization, were 15.8 percent of revenues in the quarter, compared to 17.7 percent in the year-ago quarter. Research and development (R&D) spending was 11.6 percent of overall revenues for the quarter. Pro forma net income from continuing operations for the quarter was driven primarily by revenue growth and a continuing focus on reducing the company s effective tax rate.

Lucent Technologies, headquartered in Murray Hill, N.J., USA, designs and delivers the systems, software, silicon and services for next-generation communications networks for service providers and enterprises. Backed by the research and development of Bell Labs, Lucent focuses on high-growth areas such as broadband and mobile Internet infrastructure; communications software; communications semiconductors and optoelectronics; Web-based enterprise solutions that link private and public networks; and professional network design and consulting services. For more information on Lucent Technologies, visit its Web site at http://www.lucent.com.

This news release contains forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include price and product competition, dependence on new product development, reliance on major customers, customer demand for our products and services, the ability to successfully integrate acquired companies, the timely completion of the spin-off of the enterprise networks business and final costs of the spinoff, control of costs and expenses, international growth, general industry and market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations. For a further list and description of such risks and uncertainties, see the reports filed by Lucent with the Securities and Exchange Commission. Lucent disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Contact: Bill Price Tel: 908-582-4820 (home 973-515-5038) williamprice@lucent.com or Mary Lou Ambrus Tel: 908-582-3060 (home 908-707-1147) mambrus@lucent.com, both of Lucent Technologies