Telecom Lead Europe: Nokia Siemens’ long-term strategies are going to assist the mobile broadband specialist to gain.
Nokia Siemens Networks began a year of transformation with gross and operating margin growth spurred on by the well-executed restructuring activities of 2012.
While sales fell 4.9 percent year-to-year, NSN was able to grow gross margin 740 basis points and squeeze out an operating profit of €3 million (or $4 million) in 1Q13. Profitability, rather than growth, is NSN’s primary focus at the moment. Divestments and contract and country exits are hampering revenue growth but boosting margins as the company concentrates on selling high-margin LTE equipment and professional services to operators in mature markets like the United States, Japan, and South Korea.
In 1Q13 NSN benefitted heavily from its contract with T-Mobile USA to rollout LTE. NSN’s North America region grew 49.8 percent year-to-year on the strength of the T-Mobile contract, which will continue throughout 2013 and into 2014. LTE rollouts in Japan and South Korea, which NSN had relied on for high-margin business and sales growth in 2H12, are wrapping up the coverage phase of the deployments and entering the capacity expansion phase.
NSN will win a large portion of this capacity business due to its LTE contracts with all Tier 1 operators in both countries. Capacity expansion will help maintain margins, although revenue contribution from these countries will be lower throughout 2013.
NSN’s ownership structure is uncertain as Siemens is determined to sell its 50 percent stake in the joint venture by the end of 2013
April 2013 marked the end of Siemens’ and Nokia’s shareholder agreement, giving both companies the freedom to sell their 50 percent stakes without the consent of the other. Following comments made by its CFO in March 2013, Siemens will likely sell its stake in the joint venture by the end of this year. Nokia, the struggling handset manufacturer, has not indicated a desire to sell its stake and is expected to keep its share, despite the company’s dwindling cash balance. NSN’s turnaround has been one of the few positive developments for Nokia in the last year and the handset vendor is more likely to wait for NSN to continue to build market value before offloading its stake to a third party or spinning it off in an IPO. Nokia is unlikely to purchase Siemens’ share as Nokia is embroiled in a massive restructuring of its own.
The most likely scenario has Siemens selling its stake to a third-party vendor, although Alcatel-Lucent, Ericsson, and Huawei can all likely be excluded as possible suitors. Alcatel-Lucent is undergoing restructuring as well as breaking in a new CEO and does not possess the resources to purchase half of NSN, which has an enterprise value of $8-10 billion. Anti-trust issues would likely prevent Ericsson from bidding on NSN, while the European Union and United States government would be hard-pressed to approve a partial acquisition by Huawei.
Siemens’ stake is more likely to receive interest from a more IT-focused vendor that wants to increase its prominence in the telecom infrastructure space. Japan’s NEC fits this description and could immediately add value to the venture by leveraging its telecom software and services subsidiary, NetCracker and its newly acquired BSS business from Convergys. Telecom is a strategic focus area for NEC and the company is likely to continue to pursue opportunities to consolidate the market further.
Possible changes in ownership will not deter NSN from completing its restructuring and achieving its financial targets
Despite uncertainty around its ownership situation, NSN will continue to efficiently execute its restructuring program, which remains on track to produce over €1 billion (or $1.3 billion) in cost savings by the end of 2013, compared to the end of 2011. NSN has divested six businesses since the start of restructuring, including its BSS unit to Redknee, which closed at the end of March 2013.
The sale of the Optical Networks unit, which NSN agreed to divest to Marlin Equity Partners in December 2012, is expected to close by the end of 2Q13. These transactions are helping NSN focus on its core businesses of Mobile Broadband and Global Services and efficiently allocate resources that otherwise would have gone to non-core units. TBR believes NSN is on track to achieve its long-term operating margin goals of between 5 percent and 10 percent.
Michael Soper, Networking & Mobility Research Analyst, Technology Business Research
