Future Research and Development Portfolio

Corporation : Alcatel-Lucent

Division : Wireless Carrier Equipment

Analyst : Daniel Henkel

Company Facts• CEO: Patricia Russo; Wireless: Mary Chan• HQ: Paris, 80,000 employees, 130 countries• Revenue: €18.6 billion (2006)• R&D: 10 countries (China, India), €2.7bn (2006)• Dec 1, 2006: Alcatel and Lucent merger

Revenues

Vision – Mission - ValuesVision: To enrich people’s lives by transforming the way the world communicates

Customers FirstInnovation

Teamwork

RespectAccountability

Ensuring that our custo-mers thrive, our business grows, and people’s per-sonal communications experience gets enriched.

Mission Values

Research Strategy & Focus

Bell Labs main R&D facility• Develop technically advanced products• Conduct fundamental research• Create innovations for ALU’s new products

Current focus• Wireless network modeling• WiMAX technology• Next generation cellular networks

ALU SWOT AnalysisWeaknessesStrengths

ThreatsOpportunities

• Worldwide presence• IP portfolio• Innovation capability• WiMAX leader

• Financial situation• Merger integration• Product line confusion

• Wireless broadband• All-IP networks• Emerging markets

• Few big customers• FCC regulation• Fast technology pace• Strong competitors

FinancialsShares down 47% YoY

• Q3’07: op.margin 1.6%, net income €-258M

• €12.36B market cap, €4B cash position

Markets & CustomersMarket segments along wireless network lines

2G voice only 3G voice and data 4G all-IP Fund/Platform

Main customers: cellular network operators

Opportunities in WISP market

CompetitorsStrong worldwide competitionCompany Symbol Price/$ Market Cap P/ECisco Systems, Inc. CSCO 27.45 166.54B 21.8Nokia Corp. NOK 39.49 151.39B 16.12QUALCOMM Inc. QCOM 40.12 65.66B 20.56LM Ericsson Telephone Co. ERIC 24.93 39.62B 9.85Motorola Inc. MOT 16.3 37.23B 81.09Alcatel-Lucent ALU 8.08 18.25B N/ANortel Networks Corp. NT 16.92 7.39B N/A

Asian players growing fast

Project Selection Methodology

New Project Sources

• Customer input

• Employee idea process

• Alcatel-Lucent Venture

• University Cooperation

Value Scorecard

Criteria – scale {0, 4, 7, 10}

• Option Value (3)

• Strategic Fit (9)

• Innovation Content (7)

• Prob. of technical success (5)

• Prob. of commercial success (6)

• Core Competency (4)

Resource Limitations

Estimated €2.2bn R&D budget (total)

• At disposal now: €360 million (wireless)

• 2G (10%): €36m, 3G (25%): €90m

• 4G (40%): €144m, F/P (25%): €90m

Full Time Employees

• Not the bottleneck

Portfolio Findings29 projects evaluated – c:11, o:10, d:8

17 projects funded – c:7, o:8, d:2

2G 3G - HTC handset venture - LBS for HSDPA network - GSM base station redesign - US-F inter-cultural training - Stop CDMA v1 BS - Phase out Alcatel WCDMA

4G Fundamental/Platform - WiMAX for WISP market - Cognitive Radio research - LTE standards activities - Enhance SDR platform - Exit UMB market - Stop DTN research

Balance Example Plot

X – Risk Y – Value Size – Strategic Fit

Innovation Content: High Medium Low

Visual Balance - Combined 4G and F/P Buckets

LTEup

TestSectLTEStd-o

MeshR-oSDR-o

DTN-d

BeamMax-o

EVDOrCWPlanes

$(5)

$-

$5

$10

$15

$20

$25

$30

$35

0 2 4 6 8 10

Overall Risk / [0...10]

Pro

jec

t V

alu

e /

$M

Superior

Summary & Outlook• Alcatel-Lucent strong innovator, but

distracted by merger integration• Tailored project selection methodology

supports financial and subjective criteria• Currently 17 out of 29 projects funded• €328M spent, 32M contingency• Portfolio: strategic fit, optimal value and

balance• Strong performance expected in 2009