Clean slate after share buyback, handset division sale
Still faces challenges as world telco market remains competitive
THE recent restructuring of Nokia Solutions and Networks (NSN) that will see it being folded into parent company Nokia Corp may herald new beginnings for the iconic telco gear maker.
But while Nokia now has a clean slate and a positive cash flow position, analyst firm Ovum believes the company still faces significant challenges in growing the next phase of its business.
According to various news reports, the Finnish giant recently reached two major milestones in its history. The first was when it announced a €1.7-billion (US$2.21-billion) deal last year to buy Siemens AG out of the two companies' telecom-equipment joint venture Nokia Siemens Networks.
The 2007 tie-up between Nokia and Siemens was in part conjured by the two companies – which were not considered clear leaders in the business at that time – as a strategy to gain greater scale so that they could compete with the likes of Sweden’s Ericsson, China’s Huawei Technologies as well as Franco-American vendor Alcatel-Lucent.
However, that strategy did not pan out, with Nokia Siemens Networks having accumulated a reported operating loss of €5 billion (US$6.8 billion) by the end of 2010, forcing Nokia and Siemens to inject a further €1 billion (US$1.4 billion) of fresh capital into the venture in 2011, according to The Wall Street Journal.
[€1 = US$1.4]
With the share buyback, Nokia took control of Nokia Siemens Networks and renamed it Nokia Solutions and Networks, while retaining the acronym NSN. The new unit, bolstered by aggressive cost rationalisation and product consolidation, achieved better revenue and operating profits.
The second milestone was last September when Nokia, under its then chief executive officer Stephen Elop, further boosted its cash position by selling its core mobile handset division to Microsoft Corp for US$7 billion, effectively ending its involvement in the consumer mobile space.
The deal also saw the movement of top executives from Nokia to the Redmond, Washington-based software giant, inclouding Elop himself, as well as Chris Weber and Jo Harlow. Today, Nokia claims to have solid operating profitability on the back of 10 consecutive quarters of positive free cash flow.
In tandem with these developments, Nokia’s board appointed Rajeev Suri as president and chief executive officer of the new Nokia Corporation, effective May 1.
Rajeev joined Nokia in 1995 and has held a wide range of leadership positions in the company. Since October 2009, he served as CEO of NSN prior to Nokia’s share buyback. The 47-year-old has been described as a 'turnaround specialist' and was instrumental in reviving NSN’s fortunes since taking the helm.
The ‘new’ Nokia
According to Ravi Kailat (pic), head of sales development for Nokia Asia South, Nokia has now been restructured into three distinct divisions: Networks, Here, and Technologies.
Speaking to the media in Kuala Lumpur recently, Ravi said the Networks division includes everything to do with mobile and telecommunication infrastructure, while its Here division comprises Nokia’s mapping unit, formerly known as Ovi/ Nokia Maps.
The Technologies division encompasses all of Nokia’s vast intellectual property rights as well as the programmes to “advance exploration of new technologies for the future,” he said.
“We believe that with these three businesses, we are in a leadership position today. This is part of our overall vision to be a leader in technologies where everybody and everything will be connected,” he said, adding that Nokia aims to be the world’s end-to-end mobile broadband specialist.
Not surprisingly, Nokia’s vision seems to echo that of its competitor Ericsson, which has a similar theme called Ericsson’s Networked Society. In fact, all the major telco vendors, in some way or the other, have formulated similar visions in a bid to boost revenue and profits.
When asked what differentiates Nokia from its competitors, Ravi declined to comment on its rivals’ propositions, only saying that Nokia has a very clear focus on mobile broadband and that all its discussions with its customers are geared towards this.
“It is true that themes such as the Internet of Things (IoT) [which connects things and people together] are common in the industry, but for us it’s a question of how we are going to go about getting there.
“It’s about how we are going to deliver this vision and for us, it’s about coming to the market with the right products and at the right time, and with the best quality that we can achieve.”
“And with our clear focus of what we’re going do with mobile broadband and our leadership in this area, we feel that we’re progressing quite rapidly," Ravi declared.
Despite the positive progress made by the Espoo, Finland-based telco player, Ovum believes that Nokia’s strategy will still face barriers as the telco business as a whole is facing a revenue decline.
Adaora Okeleke (pic), an analyst for telco operations with the British-based firm, pointed out in a research note that Nokia’s new company-wide strategy places the former NSN’s telecoms equipment business at the heart of the new strategy.
“The challenge is that although the Networks business accounts for more than 90% of Nokia’s overall revenues, it has experienced revenue drops in recent quarters due to business divestments and its exit from contracts in some countries.
“However, profitability has remained strong, recording a 9.3% operating margin at the end of [the first quarter of 2014], up from 7.4% in the first quarter of 2013.”
She said that in addition to the slowing spending climate in the telco sector, telecoms infrastructure prospects are gradually becoming more software-focused, with software-defined networks (SDNs) and network functions virtualisation (NFV) taking hold of current discussions.
Arguing that this trend is opening the landscape to IT companies with software expertise, Okeleke said the market would face fierce competition from companies. One such company is NEC, which has been driving its SDN and NFV solutions and advancing its propositions in these domains, she added.
“Ericsson [also] recently announced the reorganisation of its networks division into the Cloud & IP and Radio business units, which speaks volumes about where Ericsson’s new focus will be, with the Cloud & IP business unit driving its work on [Network Functions] virtualisation.”
The Ovum analyst also noted that the appointment of Rajeev as Nokia’s new CEO was an obvious choice given his track record at the company.
Rajeev (pic) had succeeded in transforming NSN from a loss-making business to the only vendor to deliver eight consecutive quarters of operating profit growth, she pointed out.
That said, the new CEO would need to seek out new opportunities to assure the top-line growth of the business, she added. “[Rajeev] Suri has proven his ability to drive growth and innovation, but he faces a tougher situation with the company’s new strategy.”
Okeleke also noted that Nokia’s Networks division needs to quickly consider its options to ensure it is not cut out of the market.
“Its cost-optimisation activities have paid off, with the move showing strong operating margins compared to its peers.
“However, the company will need to move attention away from driving profitability toward driving revenues, thus strengthening its overall market performance; ... the services market remains a lucrative part of the business and should be given a stronger level of focus.”
Okeleke said there are also opportunities for growth from Nokia’s Here and Technologies businesses.
She said the sale of the mobile phone business has lowered some of the revenue barriers that the company faced, as it no longer needs to be involved in bilateral agreements with other mobile phone manufacturers just to protect its phone business.
“Here and its mapping software can extend its deals outside the automobile industry to other businesses looking to include its mapping capability on their platforms -- for example, the deal it struck with Microsoft to provide mapping services,” she added.
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