Lower wireless Capex (capital expenditure) among telecom customers drove Nokia’s Networks revenue (90 percent of total revenue) down 11.6 percent.
The broader RAN market is in decline, negatively affecting telecom vendors that have benefited from selling high volumes of 3G and LTE hardware and services over the past several years. Challenging conditions are expected to persist for the foreseeable future, prior to a slight lift in wireless Capex attributed to 5G, closer to 2020, says Patrick Filkins, analyst at TBR.
As Nokia’s core RAN business will struggle to grow revenue in the short term, it will drive sales in adjacent portfolios, particularly fixed access and optical, as its customers build out fiber networks. Additionally, Nokia is expanding its focus to weather the downturn in wireless Capex by pursuing contracts in adjacent markets and ramping up its patents business, as evidenced by recently signed patent agreements with HMD and Samsung. Winning contracts with cloud, cable, webscale and large enterprise customers is critical to stabilizing revenue.
Nokia’s Global Services business makes progress in reinventing itself
With communication service provider (CSP) Capex expected to be flat with a negative bias through 2020, which is when 5G is expected to provide a small uplift, vendors like Nokia find themselves challenged to grow their top line and increasingly tested to drive margin increases. TBR believes a recalibrated services strategy will enable Nokia to tap into pockets of growth amid the adverse market environment.
Three key pillars are central to Nokia’s Global Services strategy: expand into a select group of non-CSP verticals (public sector, energy/utilities, transportation and large technology enterprises like banks) to drive top-line growth, extend into niche areas of the IT market to participate in CSP transformations, and drive profit stability and incremental margin growth via extreme service delivery automation. TBR believes concurrent progress in each of these areas will enable Nokia’s Global Services business unit to offset CSP spend declines and deliver roughly flat revenue while driving incremental margin improvement and profit increases through efficiency gains in service delivery.
Nokia will attempt to overcome slowing fixed market with cable, home and enterprise play
With the acquisitions of Alcatel-Lucent and Gainspeed, Nokia now has, arguably, the most comprehensive and complete portfolio of fixed-access technologies in the industry, encompassing a full range of fiber, copper, coaxial cable (via vCCAP) and fixed-wireless solutions, to support any fixed-access deployment. However, the company, as with the rest of the industry, is entering a period of slowing growth, which has prompted a strategy shift and portfolio reassessment.
Nokia’s Fixed Networks business is focused on expanding its addressable market as its traditional market slows, pushing the company to diversify into the cable, home customer premises equipment and enterprise markets. Though Nokia’s R&D machine (Bell Labs) continues to churn out new innovations such as XG-FAST, the company faces customers that are increasingly looking at the economic feasibility of making infrastructure upgrades, which will make it challenging for Nokia to continue growing the business.
