Nokia: Software Plan Already Boosting Profitability

Iain Morris
8/1/2017
100%
0%

Nokia claims its still-nascent software strategy is already helping to boost profitability just eight months after it was first announced. (See Nokia to Create Standalone Software Biz, Target New Verticals.)

The Finnish vendor last November said its ambition was to create a "significant" standalone software business generating the same kind of profit margins as a large software company. Besides ramping up software sales, the idea was to develop tools and processes that could make the wider organization more profitable, as software becomes more integral to Nokia Corp. (NYSE: NOK)'s overall business. (See Nokia's New Software Unit to 'Redesign' Company.)

That plan thrust the relatively small applications and analytics division led by Bhaskar Gorti firmly into the spotlight. Last year, the division made about €1.6 billion ($1.9 billion) in revenues -- a tiny fraction of the €21.8 billion ($25.8 billion) from network sales -- but it was Gorti's unit that would be the vehicle for Nokia's new software initiative.

Bhaskar Gets a Boost
Bhaskar Gorti, Nokia's president of applications and analytics, says the software strategy announced last November is already paying off.
Bhaskar Gorti, Nokia's president of applications and analytics, says the software strategy announced last November is already paying off.

The early signs are promising, though. For one thing, applications and analytics was a standout performer on sales in the recent April-to-June quarter. While underlying company sales fell 4% on a constant-currency basis, revenues from applications and analytics were up 9%, to €365 million ($431 million), compared with the year-earlier period, and rose 2% organically. "There has been huge growth in customer experience and analytics technologies and we are also seeing a lot of activity in our cloud infrastructure and network management portfolio," says Gorti during an interview with Light Reading.

More important is the margin improvement to which Nokia's software strategy is contributing, albeit in a small way right now. On an underlying basis, Nokia's operating margin hit 10.2% in the second quarter, up from 5.9% a year earlier. This year, the company is aiming for a margin of between 8% and 10% at the networks business. But in a previous discussion about the software strategy, Kathrin Buvac, Nokia's chief strategy officer, said a networks margin of between 10% and 15% was the long-term objective. (See Nokia Shames Ericsson on Profits but Sees Trouble Ahead.)

"On software we are benchmarking ourselves against the margin profiles that exist for software companies and we are slowly inching toward that," says Gorti. "For year-on-year growth relative to TAM [the total addressable market], and all the way from gross margin to operating margin, we are beginning to see clear results."

No doubt, the recent growth in company profitability clearly owed more to cost savings and a licensing deal between Apple Inc. (Nasdaq: AAPL) and Nokia's technologies business than to the Gorti-led software strategy. But that strategy is likely to become more important as it picks up the pace, and as trimming fat gets harder.

It could also give Nokia a profitability story based on growth while rival Ericsson AB (Nasdaq: ERIC) remains focused on cutbacks. In its own second-quarter results, the Swedish company saw its operating margin shrivel to just 0.6%, once restructuring charges were stripped out, from 7% in the year-earlier quarter, and it remains a long way off a 2019 target of 12%. Its credit rating was downgraded earlier this year due to concern that it lacks a growth strategy. (See Ericsson Shares Slump on Gloomy Q2 Update.)

What's glaringly obvious for both companies is that software, and the business models around it, will be even more critical in the future. That means Gorti's role is partly to be an agent of transformation, steering Nokia away from its old hardware-based approach. "We are wearing two hats," he says of his division. "We are building a business with applications and analytics but at the same time we are creating best practices and the components that can be used to modernize the company."

Next page: Skirting the pitfalls

(4)  | 
Comment  | 
Print  | 
Threaded  |  Newest First  |  Oldest First        ADD A COMMENT
James_B_Crawshaw
50%
50%
James_B_Crawshaw,
User Rank: Blogger
8/1/2017 | 4:32:02 PM
Organic growth is what matters
The organic growth of Application & Analytics was 2% when you strip out the contribution from Comptel (which wasn't in the prior year comparable figure). That's still impressive in comparison with Ericsson's 10% like-for-like decline in IT & Cloud. But not as impressive as 9% organic growth would have been. 
bosco_pcs
50%
50%
bosco_pcs,
User Rank: Light Sabre
8/1/2017 | 4:49:38 PM
Re: Organic growth is what matters
Just my humble opinion: While indeed 2% is not earth shaking in the startup world, $NOK is a mature company trying to break into new markets. So maybe it is good enough if Comptel can carry its own and accretive. 

It took Blackberry $BBRY for a while to get its software going, considering that is not their core competency. And a heck better than behemeths like $IBM.

In conclusion, agreeing with you about the importance of organic growth but growth by acquisition is sometimes necessary. Its worthiness can only be validated from a longer term perspective depending on integration, synergy and future utilization
iainmorris
50%
50%
iainmorris,
User Rank: Blogger
8/2/2017 | 3:28:59 AM
Re: Organic growth is what matters
'Tis a good point, so I've updated the story to provide a little more context there.
danielcawrey
50%
50%
danielcawrey,
User Rank: Light Sabre
8/2/2017 | 12:58:39 PM
Re: Organic growth is what matters
I don't think Nokia's plan was a bad idea. 

Lots of companies are now focusing on software. There are still a lot of industrial and other infrastructure processes that could use software. Nokia's focus on this could save the company long-term. 
Featured Video
From The Founder
Light Reading is spending much of this year digging into the details of how automation technology will impact the comms market, but let's take a moment to also look at how automation is set to overturn the current world order by the middle of the century.
Flash Poll
Upcoming Live Events
November 30, 2017, The Westin Times Square
December 5-7, 2017, The Intercontinental Prague
March 20-22, 2018, Denver Marriott Tech Center
May 14-17, 2018, Austin Convention Center
All Upcoming Live Events
Infographics
SmartNICs aren't just about achieving scale. They also have a major impact in reducing CAPEX and OPEX requirements.
Hot Topics
Eurobites: Telefónica Reckons Plastic Is Fantastic for FTTH
Paul Rainford, Assistant Editor, Europe, 11/15/2017
Juniper's New Contrail VP Hails From Google
Craig Matsumoto, Editor-in-Chief, Light Reading, 11/15/2017
AT&T's Lurie Leaps to Synchronoss as New CEO
Dan Jones, Mobile Editor, 11/17/2017
Animals with Phones
Live Digital Audio

Understanding the full experience of women in technology requires starting at the collegiate level (or sooner) and studying the technologies women are involved with, company cultures they're part of and personal experiences of individuals.

During this WiC radio show, we will talk with Nicole Engelbert, the director of Research & Analysis for Ovum Technology and a 23-year telecom industry veteran, about her experiences and perspectives on women in tech. Engelbert covers infrastructure, applications and industries for Ovum, but she is also involved in the research firm's higher education team and has helped colleges and universities globally leverage technology as a strategy for improving recruitment, retention and graduation performance.

She will share her unique insight into the collegiate level, where women pursuing engineering and STEM-related degrees is dwindling. Engelbert will also reveal new, original Ovum research on the topics of artificial intelligence, the Internet of Things, security and augmented reality, as well as discuss what each of those technologies might mean for women in our field. As always, we'll also leave plenty of time to answer all your questions live on the air and chat board.

Like Us on Facebook
Twitter Feed
Partner Perspectives - content from our sponsors
The Mobile Broadband Road Ahead
By Kevin Taylor, for Huawei
All Partner Perspectives