Bad Start for Nokia Siemens
NSN, a $23.2 billion-a-year supplier of infrastructure, software, and services to fixed, mobile, and cable operators, opened for business on April 1 and immediately announced reduced growth expectations. Its first three months of business will be reported by Nokia Corp. (NYSE: NOK) when it announces its second-quarter earnings next Thursday, August 2. Analysts expect Nokia to announce a loss for the joint venture instead of the positive earnings before interest and tax (EBIT) that had been expected. (See Nokia Siemens Opens on a Downer and Nokia Siemens Reveals Product Picks.) Those disappointing expectations come as NSN is linked to a possible takeover bid for Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), a move that would propel it into the fiber access market and seriously strengthen its North American operations. (See Is Nokia Siemens Tailing Tellabs? and Tellabs Mum on M&A Talks.)
So why are the analysts downbeat about NSN? Because this week Siemens AG announced a group operating profit of €1.5 billion ($2.05 billion) for its fiscal third quarter, "despite negative equity investment income of €371 million [$506 million] related to Nokia Siemens Networks (NSN)."
Siemens, which counts NSN as a "strategic equity investment" (SEI), noted that Nokia Siemens "took a total of €905 million [$1.24 billion] in charges for previously announced restructuring and integration, including €646 million [$882 million] for severance." That "severance" refers to the initial stages of the significant staff reductions at NSN. (See NSN Details Job Cuts, NSN Cuts Swiss Staff, and Nokia Siemens to Cut 9,000.)
Dresdner Kleinwort analyst Per Linderg believes Siemens's numbers "suggest that its network venture with Nokia may have underdelivered on expectations in the first three months of operations." In a research note, Linderg suggests NSN may have incurred a loss of about €100 million [$136 million), "instead of producing a respectable pre-restructuring surplus to the tune of €200 million [$272 million]," which would have been 5 percent of the expected quarterly sales of €4 billion ($5.46 billion).
A €100 million loss would hit Nokia's earnings by around €0.05 per share, notes Lindberg.
Nomura Securities analyst Richard Windsor sees roughly the same scenario. He believes NSN's operating losses will reduce Nokia's second-quarter earnings from €0.33 to €0.29, down by €0.04. That could be "badly received, given that NSN has drained EBIT by €96 million [$131 million] instead of contributing €185 million [$252 million] to it."
In his research note on the issue, Windsor adds: "This is strong evidence that life is proving to be tougher than expected and that the target of double digit margins by year end are unrealistic… [This is] negative for Nokia."
Nokia Siemens isn't the only major vendor displaying some financial fragility. Last week Ericsson AB (Nasdaq: ERIC) disappointed investors after its Multimedia unit only reported break-even numbers, instead of the expected operating profits, and Western European sales were flat. (See Ericsson Reports Q2.)
Alcatel-Lucent (NYSE: ALU) reports its second-quarter results next Tuesday, July 31. Analysts are bracing themselves for another set of results that will likely be dragged down by the ongoing merger-related issues that hit the giant vendor's first-quarter results. (See AlcaLu Details Q1 Woes.)
— Ray Le Maistre, International News Editor, Light Reading