Nokia Siemens Suffers Merger Blues

Analysts had predicted a poor set of financials from Nokia Networks ahead of today's second-quarter earnings announcement from Nokia Corp. (NYSE: NOK), and they were right. (See Bad Start for Nokia Siemens.)

At first glance, Nokia's earnings report looks healthy.

The mobile handset giant reported a significant leap in revenues and a massive 148 percent leap in profits to €2.8 billion ($3.8 billion), sending the Finnish firm's share price soaring more than 7 percent on the Helsinki stock exchange to €22.12. (See Nokia Reports 2Q07.)

The giant leap in net income includes a near €1.9 billion ($2.6 billion) one-time gain from the formation of the new infrastructure joint venture Nokia Networks , which began operations on April 1.

Behind those headline numbers, though, Nokia Siemens Networks (NSN) has experienced a torrid first few months, forcing Nokia, which reports the joint venture's financial performance, to speed up its cost-cutting program and expand it in an effort to reach profitability.

NSN reported revenues of €3.44 billion ($4.7 billion), and an operating loss of €1.27 billion ($1.74 billion), equal to an operating margin of negative 36.8 percent. That operating loss includes €905 million ($1.24 billion) in restructuring costs and one-time charges, leaving the joint venture with an operating loss after those charges of €361 million ($493 million), or negative 10.5 percent of sales.

Of that €361 million, €297 million ($406 million) was accounted for by "asset amortization" and "inventory value adjustment" costs.

Nokia said sales were lower than expected due to "competition related issues," while "price competition in the infrastructure market was unusually aggressive." That's something to which the Alcatel-Lucent (NYSE: ALU) team can relate. (See AlcaLu's Russo: We're Under Attack!.)

Sales were also affected by "challenges related to the start of operations, including delayed purchases by customers to a greater extent than expected," and a greater focus on the integration of the Nokia and Siemens businesses by the management, stated Nokia.

As a result, Nokia today announced that NSN's cost savings plan will be accelerated, with the planned €1.5 billion ($2 billion) in savings originally planned by the end of 2010 now being achieved by the end of 2008. (See Nokia Siemens to Cut 9,000.)

In addition, a further €500 million ($683 million) in annual cost savings is being targeted.

The vendor says it still expects "very slight market growth for the mobile and fixed infrastructure and related services market in euro terms in 2007," but the original target of double-digit operating margins for NSN's first 12 months of business no longer applies.

"Nokia Siemens Networks had a challenging quarter. Both net sales and margins were weak and these adverse developments require decisive action," stated Nokia's CEO Olli-Pekka Kallasvuo in the company's earnings statement. "Accordingly, Nokia and Nokia Siemens Networks are accelerating and increasing the new company's annual cost synergies target. Nokia Siemens Networks must also ensure that the company is positioned for success and leadership in the fast changing infrastructure market."

— Ray Le Maistre, International News Editor, Light Reading

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