Telecom equipment vendor NSN is outperforming most rivals in terms of margins, but underperforming in revenue growth. Can it revive?
NSN’s restructuring program, which began in 4Q11 and wrapped up in 4Q13, can be considered a success following a record high operating margin of 7.8 percent in 4Q13.
NSN emerges from restructuring a leaner, more focused company, with a clear ownership structure and consistent profitability. However, divestments and contract exits, combined with its more focused strategy, resulted in three straight quarters of double-digit revenue declines, said Michael Soper, Networking & Mobility Analyst, Technology Business Research, in a recent telecom analysis.
While NSN’s path to revenue growth in 2014 is undefined due largely to lower deployment activity in the United States, Japan, and South Korea, the company is forecasting a healthy 5 percent-10 percent operating margin for the year. TBR believes NSN will achieve its operating margin target by leaning on the efficiencies gained from restructuring and continued restraint from taking on low-margin services contracts. NSN will continue contributing positive cash flow to parent company Nokia in 2014.
NSN will shift its focus to revenue growth in 2014, but opportunities for growth are limited.
NSN CEO Rajeev Suri stated that the company would look to grow revenue in 2014 following two years of concentrating on achieving consistent profitability. The T-Mobile LTE contract, which had been a growth driver within NSN’s North America region, is winding down and TBR does not believe the Sprint TD-LTE contract will completely offset its decline.
Declining legacy GSM revenues will also prove to be a difficult hurdle to overcome in regions set to deploy LTE en masse, particularly China and Latin America. LTE deployment contacts from Latin American operators and China Mobile and China Telecom will provide slight boosts to revenue in NSN’s Greater China and Latin America regions during 2014, offsetting a pervasive decline in operator spend on legacy technologies.
CEO Suri hinted at Europe as a key cog in NSN’s path to growth. The company participated in the wave of modernizations that swept the continent in 2012, but has been struggling to secure LTE overlay contracts, which are becoming increasingly popular.
Acquiring such contracts will not be an easy task as rival Alcatel-Lucent is focused exclusively on LTE overlay opportunities and Huawei is increasingly displacing its Europe-based rivals within operator accounts.
