Nokia Networks’ margins suffered as the business mix shifted to higher sales of RAN and rollout services, and lower sales of software and core networking.
Nokia Networks’ previously peer-leading margins collapsed in Q1 2015 as the business mix shifted away from high-margin software and EPC and toward low-margin coverage projects for Sprint and China and Middle East-based operators. As a result, Nokia’s Mobile Broadband margin fell 800 basis points year-to-year to -0.2 percent. These factors will impact the business through 2015.
Nokia’s pending acquisition of Alcatel-Lucent will transform Nokia into a credible ICT alternative to Ericsson, Cisco and Huawei. TBR believes the combined company will be a strong top-tier competitor in ICT, but that the integration of the two companies will be an arduous, years-long process. Before the transaction closes in H1 2016, Nokia will maintain its current strategy targeting growth in LTE, small cells, analytics, security and systems integration.
Nokia will realize cost savings from its acquisition of Alcatel-Lucent
Nokia announced in April that it will acquire Alcatel-Lucent in an all-stock transaction valuing its French rival at €15.6 billion (or $16.6 billion). The transaction is expected to close in 1H16, provided it passes regulatory scrutiny.
The largest obstacle would most likely have been the French government, but Nokia made assurances that it would keep Alcatel-Lucent’s headcount in France at levels agreed to as part of Alcatel-Lucent’s Shift Plan restructuring, while adding R&D employees over the long term.
Additionally, Nokia will establish a €100 million or $133 million investment fund to support French startups as well as maintain or establish services hubs, centers of excellence in 5G, small cells, cybersecurity and wireless, and keep Bell Labs in France.
Merging the various cultures (Finnish, German, American, French, etc.) will be a challenge and likely take several years. The combined entity will retain the Nokia name, Nokia CEO Rajeev Suri, and Nokia Chairman Risto Siilasmaa.
While headcount reductions will take place, Nokia plans to realize much of the €900 million or $1.2 billion in expected cost savings through a combination of lower procurement, real estate, general & administrative (G&A) and IT costs.
Nokia is likely to eliminate redundancies in areas such as selling, marketing and G&A, while maintaining current R&D investment levels to capitalize on Alcatel-Lucent’s Bell Labs, which remains one of Alcatel-Lucent’s most attractive assets given its patent trove and engineering talent.
Nokia will benefit from increased scale and a more comprehensive portfolio
Nokia’s well-respected leadership team and recent acquisition and restructuring history suggest that integrating a company the size of Alcatel-Lucent will be difficult but successful. Nokia leveraged its billion-dollar acquisition of Motorola Networks into drastic improvements in product quality and an increase in North American market share.
The company’s restructuring was executed swiftly and decisively, yielding a company with higher gross and operating margins than many peers. However, restructuring pared down Nokia’s portfolio to the point where it could not offer comprehensive solutions for operators.
Acquiring Alcatel-Lucent gives Nokia the fixed access, IP core routing and optical assets it lacked, as well as strong SDN and cloud offerings in Nuage Networks and CloudBand. The combined entity’s portfolio overlaps heavily in wireless access; however, Alcatel-Lucent’s small-cell business is in a stronger market position compared to Nokia’s thanks to several Tier 1 agreements in the U.S.
Beyond telecom, Alcatel-Lucent expands Nokia’s addressable market to large enterprises. Post-restructuring, Nokia focused exclusively on the mobile broadband opportunity and did little to transform into an ICT vendor. Alcatel-Lucent, through its Nuage Networks subsidiary, is addressing the SDN priorities of large enterprises.
Michael Soper, telecom analyst at Technology Business Research
