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NSN Braces for Tough Start to 2014

Ray Le Maistre
1/23/2014
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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
Revenues €3,105 €3,988 -22% €2,592 20%
-- 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
Revenues €11,282 €13,779 -18.1%
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

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Ray@LR
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Ray@LR,
User Rank: Blogger
1/24/2014 | 5:07:44 AM
Re: Cautious but optimistic
I just have to note that while it is true that the financial analyst community was not interested in NSN until now, Light Reading was most certainly always interested...

:-) 
Ray@LR
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Ray@LR,
User Rank: Blogger
1/24/2014 | 5:06:33 AM
Re: Selective?
Ha - yes, good question.

It seems to be a two-way street. A bunch of major vendors (ALU, ERIC, NSN) all say they won't engage in deals that don't meet minimum profitability thresholds -- and that they walk away from anything where the price demands of the customer are too low.

BUt - they need cashflow and scale right? If the margin is very slim on a monster deal with China Mobile, is NSN giong to walk away? How selective can it (or anyone else) be?

It's too simple, I think, to justy believe that Huawei and ZTE pick up all the deals that others allegedly wouldn't touch.

There are more factors than just price, but that's a pretty critical one.
R Clark
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R Clark,
User Rank: Blogger
1/23/2014 | 9:30:54 PM
Selective?
Fine work by NSN to keep themselves in the game, but I'm wondering how a vendor gets to be 'selective'.
Kruz
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Kruz,
User Rank: Light Sabre
1/23/2014 | 2:41:48 PM
Re: Cautious but optimistic
It is certainly going to be interesting to watch as Nokia becomes NSN or NSN becomes Nokia. NSN is now responsible for the biggest part of income at Nokia, while it always relied on cash from its parent to survive all the mishap it had. NSN will have to do it right and it has one shot at it this time. It now has the money from MSFT to survive and to invest in its RAN, but it clearly needs a strong industry to rely on now that Nokia="NSN" sold its device unit.

Nokia has changed its core business many times during its 150 years old times; I hope they can do that again.

No one was interested in NSN two years ago when it was aiming to be bought and the layoffs and restructuring were not a choice. The company had no other options.
AnthonyP
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AnthonyP,
User Rank: Lightning
1/23/2014 | 2:40:10 PM
Re: Cautious but optimistic
It will take a while, NSN have many toxic deals they are still servicing. If chinese vendors stop digging into their financing pots NSN stand a chance. Not comfortable with their single dependency on Mobile Broadband though.
Ray@LR
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Ray@LR,
User Rank: Blogger
1/23/2014 | 12:07:51 PM
Cautious but optimistic
The NSN CEO has always been cautious in his outlook - maybe you could say he has been realistic (?).

And this is another instance. So H1 might be a bit tough for the company but look at where it is compared with 2 years ago -- it's been very hard on a lot of people that used to work at NSN (no one likes to let people go) but this company is still in business, as Suri argued it would be when some were pinning the 'Next Nortel' badge on it.

I think Suri is to be commended. NSN is a company that could have gone down under the weight of industry and internal pressure - but it hasn't.

Some might say 'not yet' but it wouldn't surprise me if NSN comes out of 2014 in a stronger position that it is now.
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