RNS Number:2143R
Marconi Corporation PLC
23 October 2003
Press enquiries:
Joe Kelly, tel: 0207 306 1771; email: joe.kelly@marconi.com
David Beck, tel: 0207 306 1490; email: david.beck@marconi.com
Investor enquiries:
Heather Green, tel: 0207 306 1735; email: heather.green@marconi.com
Marconi Corporation plc
Trading Update for the three months ended 30 September 2003
* 6 per cent sequential sales increase to #389 million (Q1 FY04: #367
million)
* strong sales performance in US business (up 15%) driven by higher sales to
the US Federal Government and increased level of broadband access deployment
* stability in European/Rest of World business (up 2%)
* Increased orders received during quarter leads to book-to-bill ratio of
1.22 (Q1 FY04: 0.95); Network Equipment 1.14 (Q1 FY04: 1.02), Network
Services 1.36 (Q1 FY04: 0.85)
* Further market traction for next generation products; significant new
business wins include: 3-year frame contract for Access Hub to BT; further
units of BXR-48000 to US Federal Government and a large European financial
institution; next generation SDH equipment to BT and China Unicom
* Major new long-term services contracts awarded in Middle East and Germany
* Improved operational performance resulting from significant cost savings
and more favourable business mix; good progress made towards target
operational run-rates (before goodwill amortisation, exceptional items and
share option costs); full details to be released with interim results
announcement
* Continued solid execution of cash generation plans
* Fourth consecutive quarter of positive operating cash flow (before
exceptional items) supported by further contribution from working capital
management
* Net cash position increased from #5m at 30 June 2003 to #99 million at 30
September 2003
* Major milestones achieved to date towards Junior Notes paydown through
disposal of non-core investments
* Q3 Sales Outlook
* General trading conditions remain challenging; maintaining cautious view
on potential volatility in near-term market environment
* Targeting stable sales performance in traditionally weaker third quarter
on back of recent order intake and current stronger demand for fixed
wireless access equipment in Germany
London - 23 October 2003 - Marconi Corporation plc (LSE: MONI; NASDAQ: MRCIY)
today provided a trading update for the second quarter ended 30 September 2003.
Mike Parton, Chief Executive, said: "Our performance during the quarter reflects
our persistent focus on sales, cash management and cost reduction, despite the
continued difficult trading conditions in our industry.
"Whilst we remain cautious about the shorter term outlook, we are confident for
the Company's and industry's long term prospects."
Interim Results - 13 November 2003
Marconi will announce interim results for the three months and six months ended
30 September 2003 on 13 November 2003 and will host a presentation for analysts
and investors in London at 4pm on that date. Full details will be issued
shortly. Consequently, management will not host a conference call in connection
with this trading update. Any analyst or investor enquiries should be directed
to Heather Green, head of Investor Relations.
Basis of Preparation
The financial information in this trading update is un-audited and has been
prepared in accordance with UK accounting policies set out in Marconi
Corporation plc's 2003 Annual Report and Accounts.
Trading Update
Orders and Sales Overview
Despite continued difficult conditions in the market for telecommunications
equipment and services, Marconi experienced a higher level of demand in some
areas by certain customers during the quarter. In aggregate, these pockets of
increased demand resulted in sequential growth in both orders and sales compared
to the first quarter of the financial year. The Group is beginning to see early
signs of some of its major customers looking towards next generation network
projects but maintaining a prudent stance to spending on current technologies
and a continued tight control of capex budgets. As a result, Marconi maintains
its cautious view on potential volatility in near-term market conditions (see
Sales Outlook on page 7 below).
At #389 million, Group sales increased by approximately 6 per cent compared to
the previous quarter (Q1 FY04: #367 million). Network Equipment, which accounted
for 65 per cent of second quarter sales grew by some 10 per cent with increases
recorded across all of the Group's US equipment businesses (Broadband Routing &
Switching (BBRS), North American Access (NAA) and Outside Plant & Power (OPP))
as well as in Access Networks in Europe. Network Services accounted for 35 per
cent of Group sales and was stable quarter on quarter in both Europe and the US.
The level of orders received was higher than sales in both Network Equipment and
Network Services, leading to an overall book-to-bill ratio of 1.22. Book-to-bill
is the ratio of order intake divided by the level of sales in any given period.
Management use this as a key indicator of future short-term sales performance in
the Network Equipment business and the Group strives to increase and maintain
this ratio above 1.00 over any 12-month period. Book-to-bill in Network
Equipment increased to 1.14 (Q1 FY04: 1.02). This ratio is less meaningful in
Network Services given the long-term contract nature of this business where the
full value of a service contract, which can typically be several tens of
millions of #sterling is booked at the point of firm contract signature and then
translates into sales over the life of the contract, which can typically be over
a period of 2 to 5 years. Two major new long-term service contracts booked in
the quarter - in the Middle East and Germany - were the main drivers of a
book-to-bill ratio of 1.36 in Network Services (Q1 FY04: 0.85).
Order intake was up in most of the Group's main markets compared to the first
quarter, and particularly in Germany, United Kingdom, United States and Asia
Pacific. In Germany, this was a result of strong demand from wireless operators
such as O2, E-Plus and Vodafone, as they begin to roll out 3G mobile networks in
order to reach the 25 per cent mobile coverage threshold prior to the 31
December 2003 deadline set by the national regulator. In the United Kingdom, BT
increased orders for optical equipment spares and renewed a contract for care
and maintenance services for its System X narrowband switching network. BBRS led
the increase in orders in the US as a result of increased spending by the US
Federal Government. Growth in China and Malaysia was driven by order renewals
for optical equipment.
In addition to the major Network Service orders mentioned above, recently
announced significant business wins in Network Equipment include a 3-year frame
contract with BT for the provision of Marconi's multi-service access node, the
Access Hub. Also using this technology, FastWeb (Italy) became the world's first
operator to offer live broadcast services over ADSL with multicast video
technology. In the US, Marconi announced the sale of further units of its
BXR-48000 multi-service switch-router to the Federal Government.
Sales by Geographic Destination
in #m 3 months ended
30.09.03 30.06.03 30.09.02
EMEA 223 220 289
North America 131 111 142
CALA 12 9 10
APAC 23 27 45
Continuing Operations - 389 367 486
total
Discontinued Operations - - 28
Group 389 367 514
Europe, Middle East and Africa (EMEA) accounted for #223 million or 57 per cent
of Group sales during the second quarter. Growth in Italy and Germany more than
offset reduced levels of sales in the UK and Middle East, leading to overall
stability in sales compared to the previous quarter (Q1: #220 million).
In the UK, sales to BT were relatively stable quarter on quarter but the mix of
activities changed significantly. An increased level of service activities
including installation and commissioning and cable installation projects offset
a reduction in sales of optical network equipment as the Group's largest
customer continued to focus capital expenditure programmes on broadband access
deployment rather than optical equipment. Conformance testing of Marconi's
Access Hub into BT's network is progressing well and the Group expects to
initiate shipments under its recently awarded 3-year frame contract early in the
next calendar year.
Sales in the Middle East were down slightly on the previous quarter as a result
of the continued slowdown in the market following the recent conflict in the
region. During the quarter, Marconi announced a 3-year #46 million managed
services contract to provide operation and maintenance support for a military
network in the Middle East, which will commence in February 2004.
In Italy, sales to Telecom Italia were down slightly in the quarter as a result
of phasing of shipments under Marconi's optical frame contract but this was more
than offset by sales growth generated through increased deliveries of next
generation optical products, in particular the MSH64c and MSH2K optical core
switches to Vodafone (ex-Omnitel). In Germany, growth was fuelled by initial
shipments to meet the increased demand for fixed wireless access products from
mobile operators described above.
Marconi recorded strong growth in North America where sales increased by 18 per
cent to #131 million (Q1: #111 million). Three main factors contributed to this
trend: i) increased demand from the US Federal Government at the end of its
fiscal year, benefiting the Group's BBRS business; ii) increased spend on DSL
deployments benefiting the Group's North American Access businesses; and iii)
increased spending by US wireless operators benefiting the Group's Outside Plant
& Power business.
There was no marked change in market conditions in Central and Latin America
(CALA) during the period. Sales increased to #12 million from the low level of
#9 million during the previous quarter. Current demand in CALA is coming from
the wireless rather than fixed wireline operators.
In Asia Pacific (APAC), sales fell by approximately 15 per cent to #23 million.
Whilst sales to Telecom Malaysia were down quarter on quarter, the operator has
recently renewed Marconi's SDH frame contract and placed an initial order for
access equipment. In Australia, there was a slight decrease in sales as Telstra
delayed certain capital expenditure plans pending the outcome of its bid to
purchase the assets of IP1 (in receivership).
Sales by Product Area
in #m 3 months ended
30.09.03 30.06.03 30.09.02
Optical Networks 80 85 108
Access Networks 48 44 69
Other Network Equipment 16 12 15
Europe/RoW Network Equipment 144 141 192
IC&M 47 43 51
VAS 61 64 105
Europe/RoW Network Services 108 107 156
Europe/RoW - Total 252 248 348
BBRS Equipment 38 28 35
OPP Equipment 39 35 34
North American Access 30 25 23
US Network Equipment 107 88 92
BBRS Services 15 15 24
OPP Services 15 16 18
US Network Services 30 31 42
US businesses - Total 137 119 134
Network Equipment and Network 389 367 482
Services - Total
Other - - 4
Continuing Operations -Total 389 367 486
Discontinued Operations - - 28
Group 389 367 514
Optical Network sales were #80 million, down #5 million or 6 per cent on the
previous quarter. The market for optical network equipment remains depressed, as
expected, with operators spending only to maintain the smooth running of
existing infrastructure as opposed to new build projects. The Group expects this
trend to continue in the medium-term as operators focus capital expenditure
plans on the roll-out of broadband access networks. From a geographic
perspective, the drop in sales occurred in EMEA while quarter on quarter sales
in APAC and CALA were stable. In EMEA, which accounted for approximately 75 per
cent of Optical Network sales in the period, the reduced level of sales to BT
discussed above were partially offset by increased sales to Vodafone and Wind in
Italy. From a product line perspective, sales of DWDM fell further during the
quarter in the face of decreased demand for this technology across the industry.
Sales of SDH equipment, however, which accounted for over 80 per cent of Optical
Network sales in the period, were up slightly quarter on quarter with further
progress made in migrating existing customers to Marconi's recently launched
next generation optical products with shipments to the Italian market and orders
received in China and the UK.
Marconi recorded a 9 per cent sequential increase in sales of Access Networks,
from #44 million in the first quarter to #48 million. This was driven by the
increased demand for fixed wireless access products from German wireless
operators described above, with Fixed Wireless Access accounting for
approximately 38 per cent of Access Network sales in the quarter. Marconi
maintained the level of shipments of its multi-service access node, the Access
Hub, which accounted for approximately 20 per cent of Access Network sales with
shipments to Telecom Italia, Wind and Telkom South Africa. The balance of Access
Network sales related to Voice Systems (25 per cent) and other legacy narrowband
access products (17 per cent).
Sales of Other Network Equipment increased by 33 per cent to #16 million (Q1
FY04: #12 million) mainly as a result of shipments of multi-media terminals to
Telefonica (Spain) and payphones into the APAC market.
Overall Network Services in Europe / Rest of World were stable quarter on
quarter with an increased level of IC&M activity particularly in Italy and the
UK (up #4 million or 9 per cent to #47 million), offsetting slightly lower sales
of Value-Added Services (down #3 million or 5 per cent to #61 million). The
aftermath of the recent conflict in the Middle East and tough market conditions
in Wireless Software and Services continue to affect the VAS business. Reduced
sales in these areas were, however, partially offset during the quarter by an
improvement in cable installation services due to increased volumes from frame
agreements and by initial sales to a new customer in the German transportation
market within the Group's Integrated Systems activity.
BBRS recorded 36 per cent growth in equipment sales during the period, which is
typically a strong quarter for this business (up #10 million to #38 million).
This strong quarterly performance was driven by increased sales to the US
Federal Government at the end of this customer's fiscal year and includes sales
of Marconi's BXR-48000 multi-service switch router under the #6 million
agreement announced at the end of the quarter. BBRS service sales were stable
quarter on quarter at #15 million with increased levels of professional services
to the US Federal Government offset by a further decline, as expected, of
support sales to the Group's North American enterprise customer base.
North American Access sales improved by #5 million or 20 per cent to #30 million
during the quarter, largely as a result of the acceleration of ADSL roll-outs
(particularly at BellSouth).
OPP total sales increased by 6 per cent from #51 million in the first quarter to
#54 million, with equipment sales up 11 percent to #39 million and services
relatively flat at #15 million compared to #16 million in the previous quarter.
Marconi has been successful in securing a number of new wins of outside plant
and power systems, primarily fuelled by increased demand from North American
wireless operators.
The net impact of foreign exchange translation on Group sales compared to the
previous quarter was negligible.
The ten largest customers during the three months ended 30 September 2003 were
(in alphabetical order) AT&T, BellSouth, BT, Metro City Carriers, Sprint,
Telecom Italia, US Federal Government, Verizon, Vodafone Group and Wind. In
aggregate, these customers accounted for 52% of sales of continuing operations
(Q1 FY04: ten largest customers 51 per cent ). BT accounted for 19 per cent of
sales of continuing operations (Q1 FY04: 20 per cent).
Sales Outlook
The Group is beginning to see early signs of some of its major customers looking
towards next generation network projects but maintaining a prudent stance to
spending on current technologies and a continued tight control of capex budgets.
As a result, Marconi maintains its cautious view on potential volatility in
near-term market conditions and believes it to be too early in the cycle for
these early signs to be an indicator of market recovery. Whilst there has been
some improvement in visibility of future orders from some customer accounts in
certain areas, the ability to accurately predict sales beyond the current
quarter remains challenging.
Nevertheless, Marconi is targeting to achieve stable sales in the third quarter
compared to the #389 million recorded in the quarter just ended. This is partly
based on the order gap, which is at the same level as the Group enters the
current quarter as it was at the beginning of the second quarter, and is
significantly lower than at the same period in the first quarter of the
financial year. The Group defines order gap as the orders to be booked in order
to reach the targeted level of sales in any given quarter and management
considers this to be a meaningful measure of future short-term sales
performance. In addition, the Group expects the strong demand for fixed wireless
access products in Germany to continue to translate through to sales until the
end of the calendar year.
Operational Performance
There was a marked improvement in operational performance compared to the
previous quarter and Marconi made further progress towards its financial
year-end operational targets. In particular, substantial cost savings achieved
in the Group's supply chain and engineering operations and the significantly
improved business mix driven by the increased proportion of higher-than-average
margin BBRS equipment and services, led to a strong increase in gross margin
(before exceptional items). Savings in the Group's supply chain were mainly the
result of the transfer of its outsourced operations to lower cost Jabil
locations in Hungary and Scotland.
Group headcount was reduced to approximately 14,100 at 30 September 2003 from
approximately 14,700 at 30 June 2003. Approximately 260 employees were
transferred to Finmeccanica during the quarter following the disposal of
Marconi's UMTS activity, which was completed in August 2003.
Further significant cost actions have been taken recently, which will bring
further benefits in future periods. These include i) the outsourcing of the
Group's fixed wireless access manufacturing operations in Offenburg (Germany) to
Elcoteq signed in October 2003, the full benefits of which will begin to come
through during the financial year ending 31 March 2005, and ii) the closure of
the Group's headquarters for the CALA region previously based in Florida (USA).
All corporate functions for the CALA region will be managed from the Group's
Italian operations, where the Group's relationships with customers in Brazil and
Mexico originated. Sales and marketing and general and administrative cost
savings generated by this move will take effect during the current quarter.
The Group will disclose full details of gross margin, operating costs,
exceptional items (relating mainly to its ongoing operational restructuring
process) and overall operating result in its interim results announcement on 13
November.
Cash Flow
Marconi recorded its fourth consecutive quarter of positive operating cash flow
(before exceptional items), largely as a result of further improvements in
working capital metrics particularly a reduction in debtor days. This was the
result of the successful negotiation of improved payment terms with a number of
key customers in Northern Europe. Positive operating cash flow combined with the
proceeds from disposals completed during the quarter (including the Group's
stake in Easynet Group plc and Bookham Technology plc) more than offset
non-operating cash outflows incurred in the period. These included exceptional
operating cash outflows mainly related to final fees paid to advisors to
complete the financial restructuring and to the Group's ongoing operational
restructuring.
In accordance with the terms of the Group's new Notes, proceeds from disposals
and certain releases of cash collateral relating to performance bonds were
applied to the mandatory partial redemption of Junior Notes at 110 per cent face
value. In total during the quarter, approximately US$186 million (approximately
#116 million) was used to fund the US$169 million (approximately #106 million)
reduction in principal amount of the Junior Notes and the US$17 million
(approximately #10 million) redemption premium. Full cash flow details will be
disclosed in the Group's interim results announcement.
Cash and Debt
Group net cash increased to #99 million at 30 September 2003 compared to net
cash of #5 million at 30 June 2003. The following table sets out the composition
of the Group's net cash balances at 30 June and 30 September 2003:
in #m 30.09.03 30.06.03
Senior Notes 1 (432) (435)
Junior Notes 2 (191) (295)
Other bilateral and bank debt (50) (53)
Gross financial indebtedness (673) (783)
Cash and liquid resources 772 788
Net Cash 99 5
1. US$717 million
2. US$487 million at 30 June 2003 reduced to US$318 million at 30 September 2003
At 30 September 2003, the Group's cash and liquid resources totalled #772
million (30 June 2003: #788 million). Of this amount, #210 million represented
amounts which would be classified as restricted cash, and #562 million
represented free cash available to the Marconi Corporation plc Group. The
following table sets out the breakdown of these restricted and free cash
balances at 30 June and 30 September 2003:
in #m 30.09.03 30.06.03
Performance Bonds:
Cash collateral on existing 108 121
performance bonds
Cash collateral on new performance 27 22
bonding facility
Performance bonding escrow account 41 41
Total - Performance Bonds 176 184
Captive insurance company 19 18
Collateral on secured loans in Italy 13 15
Mandatory Redemption Escrow Account (MREA) 2 -
Total Restricted Cash 210 217
Cash held at subsidiary level and cash in transit 65 84
Available Treasury deposits 497 487
Total Cash and Liquid Resources 772 788
During the quarter, the Group was able to release approximately #13 million from
cash collateral on performance bonds issued prior to completion of the financial
restructuring. Of this amount, approximately #4 million was placed as collateral
against the Group's new bonding facility and approximately #9 million was
applied to partial redemption of the Group's Junior Notes. The new bonding
facility allows Marconi Bonding Limited to procure a total of #50 million of
performance bonding. These bonds will be fully collateralised, with 50 per cent
of collateral being placed at time of issuance of the bond (#2 million at 30
September 2003, #1 million at 30 June 2003) and 50 per cent being rolled over
from releases of collateral on existing bonds (#25 million at 30 September 2003,
#21 million at 30 June 2003).
Also, in the quarter, the Group continued to optimise the level of cash balances
held within the Group's Treasury centres and this was the main reason for the
#19 million reduction in cash held at subsidiary level and cash in transit in
the table above.
Gross financial indebtedness at 30 September 2003 stood at #673 million, a
reduction of #110 million compared to the position at 30 June 2003. This related
mainly to the impact of the mandatory partial redemptions of the Junior Notes
completed on 31 July 2003 (US$66 million, approximately #41 million) and 30
September 2003 (US$103 million, approximately #65 million). Proceeds from the
sale of the Group's stake in Bookham Technology plc were transferred from
available Treasury deposits to the Mandatory Redemption Escrow Account after the
end of the quarter. As previously disclosed, these were used to fund a further
mandatory partial redemption of the Junior Notes on 17 October 2003 (US$29
million, #17 million) further reducing the principal amount of Junior Notes
outstanding to US$289 million (approximately #174 million) at that date.
The balance of the reduction in gross financial indebtedness during the quarter
related mainly to the reduction in bilateral and other bank debt.
As previously notified on 28 August 2003, Marconi has elected to make the second
coupon payment due on its Junior Notes on 31 October 2003 in cash (approximately
#4.3 million).
ENDS/...
About Marconi Corporation plc
Marconi Corporation plc is a global telecommunications equipment, services and
solutions company. The company's core business is the provision of innovative
and reliable optical networks, broadband routing and switching and broadband
access technologies and services. The company's customer base includes many of
the world's largest telecommunications operators.
The company is listed on the London Stock Exchange under the symbol MONI and on
Nasdaq under the symbol MRCIY.
Additional information about Marconi Corporation can be found at
www.marconi.com.
Copyright (c) 2003 Marconi Corporation plc. All rights reserved. All brands or
product names are trademarks of their respective holders.
This document contains certain statements that are not historical facts,
including statements about Marconi's expectations and beliefs and statements
with respect to its business plan and other objectives. Such statements are
forward-looking statements. These statements typically contain words such as
"intends", "expects", "anticipates", "estimates" and words of similar import.
Undue reliance should not be placed on such statements, which are based on
Marconi's current plans, estimates, projections and assumptions. By their
nature, forward-looking statements involve risk and uncertainty because they
relate to events and depend on circumstances which may occur in the future.
There are a number of factors that could cause actual results and developments
to differ materially from those expressed or implied by such forward-looking
statements. These factors include, but are not limited to future revenues being
lower than expected; increasing competitive pressures within the industry;
general economic conditions or conditions affecting the relevant industries,
both domestically and internationally, being less favourable than expected.
Marconi has identified some important factors that may cause such differences in
the Company's Form 20-F annual report for year ended 31 March 2003 and Form 6-K
report for the quarter ended 30 June 2003 filed with the US Securities and
Exchange Commission. Marconi disclaims any obligation to publicly update or
revise these forward-looking statements, whether to reflect new information or
future events or circumstances or otherwise.
This information is provided by RNS
The company news service from the London Stock Exchange
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