It’s another rebuilding year for Alcatel-Lucent (NYSE: ALU).
“Things are not off to a great start for Alcatel-Lucent,” RBC Capital Markets analyst Mark Sue wrote after the vendor’s first-quarter earnings report today. “Challenged segments remain carrier and enterprise, although there were some bright spots in IP and WCDMA. Application software grew in the mid-single-digit rate (at constant currency), while services continue to chug along, growing in the high teens. North America saw the biggest rate of revenue decline, down 28% year over year.”
A notable aspect of the company’s rebuilding is its reduction in research and development (R&D) spending, particularly in the back half of the year, as it looks to partners to help carry the load of innovation. Though Alcatel-Lucent’s R&D spending increased 3% sequentially in the first quarter, the vendor said it will decrease as the year goes on, particularly in the second half.
Meanwhile, the company will shift its R&D spend from legacy to next-gen technologies, spending 60% of its R&D this year in four areas in which it spent 40% of its R&D in 2008: next-gen wireless access (LTE, WCDMA and converged RAN), fixed access (VDSL and GPON), IP (service routers, carrier Ethernet, evolved packet core and IMS) and optics (WDM, microwave packet radio and packet optical transport).
The vendor will also cut spending on older technologies including ATM-based ADSL, TDM switching, CDMA 1x, GSM, ATM and legacy optics. And it will partner or “co-source” in some markets, such as mobile WiMax, customer premises equipment, non IMS-based fixed NGN and some legacy applications. Alcatel-Lucent is currently talking to potential partners about those opportunities and will make announcements related to those discussions in the next quarter or two, the vendor said.
“There are many champions to do something new,” Alcatel-Lucent’s Chief Executive Officer Ben Verwaayen said today. “You don’t find too many champions to stop doing something…Every product has a customer. Every product has a champion. Every product has people related to it.”
However, he also added, somewhat vaguely, “Some of our products that may be subscale for us are certainly not subscale for others. So I think there are many opportunities that over time will materialize.”
“In our view, there’s more product rationalization required at Alcatel, and the focus remains LTE, WCDMA, fixed access, and IP,” Sue wrote today. “Alcatel’s market share still remains subscale in these segments, so the company must spend in R&D to catch up, in our view.”
Sue expects the vendor to spend nearly $2.7 billion in R&D this year (or nearly 18% of sales), slightly more than last year in dollars and 2 percentage points more relative to sales.