NSN Braces for Tough Start to 2014
With its business now consistently profitable at an operating level and its restructuring program now all but complete, NSN is turning its attention to ramping up its revenues, CEO Rajeev Suri told investors during the Nokia Corp. (NYSE: NOK) fourth-quarter earnings conference call today.
But those efforts might take time to show up in NSN's numbers.
Nokia Networks unveiled fourth-quarter and full-year financial results today as part of parent Nokia's earnings release. (NSN is now the largest of the three businesses remaining in Nokia's continuing operations, as the handsets business is now reported as "discontinued" following the confirmation it is being sold to Microsoft. The other two continuing businesses are the maps app specialist HERE and Advanced Technologies, which manages the company's intellectual property/patents assets.)
The mobile network equipment and professional services vendor reported fourth-quarter revenues of €3.1 billion (US$4.24 billion), a sequential improvement of 20% from the third quarter but down 22% from the same period a year earlier. The non-IFRS operating margin (after one-time costs) of 11.2% was down from a year earlier but up sequentially, as the table below shows.
Table 1: NSN Fourth-Quarter 2013 Key Financials
|Millions of euros||Q4 2013||Q4 2012||Year-on-year change||Q3 2013||Sequential change|
|-- Of which Mobile Broadband||€1,563||€1,776||-12%||€1,259||24%|
|-- Of which Global Services||€1,540||€1,979||-22%||€1,331||16%|
|Non-IFRS gross margin*||37.6%||36.0%||Up by 1.6 percentage points||36.6%||Up by 1 percentage point|
|Non-IFRS operating margin*||11.2%||14.4%||Down by 3.2 percentage points||8.4%||Up by 2.8 percentage points|
|* = After one-time costs|
The company noted that the year-on-year decline in sales was due in part to the sale of some assets and also to its strategy to exit unprofitable contracts and markets. But even if divestments and exited contracts/markets are discounted, NSN's fourth-quarter revenues were still down by 15%, due to "reduced wireless infrastructure deployment activity, which affected both Global Services and Mobile Broadband."
For the full year 2013, sales were down but margins improved, as the table below shows.
Table 2: NSN Full-Year 2013 Key Financials
|In euros millions||2013||2012||Year-on-year change|
|Gross margin||36.6%||30.3%||Up 6.3 percentage points|
|Non-IFRS operating profit*||€1,090||€782||39.4%|
|Non-IFRS operating margin*||9.7%||5.7%||Up by 4 percentage points|
|* = After one-time costs|
Again, part of the sales decline was attributed to divestments and exits, but even after these were discounted, NSN's revenues were still about 13% down compared with 2012.
So now Suri, who noted during Thursday's earnings conference call that he is "not satisfied" with the current level of revenues, is on a sales drive. That will be helped by the significant mobile rollouts in China, where NSN has won deals with China Mobile Ltd. and China Telecom Corp. Ltd. and believes it's on course to be "the leading foreign vendor," and by improving capital expenditure trends in Western Europe and Russia. (See APAC Fuels 4G Action, Report: Huawei, ZTE Win Big at China Mobile, and NSN Gets Aggressive in China.)
The CEO is also hopeful that NSN's deal with Sprint Corp. (NYSE: S) will help its US business now that revenues from T-Mobile US Inc. are winding down. (See Sprint Sparks Up Vendors for Faster 4G LTE.)
But the CEO noted that the first half of 2014 is going to be "challenging," not only in terms of sales but also on its margins, as NSN is currently engaged in some major network rollout projects that in the early stages of the deals involve the supply of lower-margin equipment, while higher-margin capacity upgrades come later in the contract cycle. (This is a trend also noted by Ericsson in recent years.)
As a result, NSN expects its non-IFRS operating margin (after one-time costs) to be around 5%, or possibly even lower.
But Suri noted that NSN is not looking to boost its sales by low-balling on price. He assured investors and analysts that NSN is only committing to contracts that deliver long-term profitability. "We are being selective," he stressed, noting that NSN's projected full-year non-IFRS operating margin for 2014 is expected to be "towards the higher end of the company's target range of 5% to 10%."
He also noted that the company-wide cost reduction and restructuring program announced in late 2011 is now all but complete, and that the vendor's operating expenses and production costs have been reduced by €1.5 billion during the past two years. NSN ended 2013 with 48,409 staff compared with about 74,000 at the end of 2011. (See NSN Unveils Its Kill List.)
— Ray Le Maistre, Editor-in-Chief, Light Reading