Nokia to Create Standalone Software Biz, Target New Verticals

Nokia today said it would create a "significant" standalone software business and target new vertical markets worth €18 billion ($19.4 billion) annually, as it aims to buck a decline in its main addressable market.

The Finnish vendor said it wanted to move beyond its "product-attached software model" and set up a unit with the margin profile of large software companies.

While details of the new venture are still thin, two focus areas will be enterprise software and IoT platforms, Nokia Corp. (NYSE: NOK) revealed in a statement published this morning.

The Finnish vendor has had a bruising few quarters since completing its €15.6 billion ($16.8 billion) takeover of Alcatel-Lucent (NYSE: ALU) at the start of the year and expects conditions to remain tough in 2017.

Having already forecast that its main addressable market will decline by a "low single digit" percentage next year, Nokia served up further disappointment for investors, predicting that sales at its networks business -- which accounts for about 90% of the total -- will fall at the same rate. (See Nokia Forecasts Sales Decline in 2017, Shares Fall.)

Despite details of new strategic ambitions, investors took fright at the latest projections, sending Nokia's share price down 4% in morning trading in Helsinki.

Over the next five years, said the company, the main addressable market -- worth about €113 billion ($122 billion) this year -- will grow at a compound annual growth rate (CAGR) of about 1%.

However, Nokia believes it can grow its business faster by diversifying into new vertical markets worth about €18 billion ($19.4 billion) in sales this year and forecast to have a five-year CAGR of about 13%.

Those verticals include energy, transportation, the public sector, so-called "technological extra-large enterprises" and the web-scale players.

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The company had revealed plans for a big push into the enterprise sector during a press briefing in London in September, indicating that it currently generates about €1 billion ($1.1 billion) annually from enterprise customers -- with 70-80% of that amount coming from the Alcatel-Lucent business. (See Nokia's Leprince Wants to Be King of Enterprise.)

The figure represents a small percentage of sales at Nokia's overall networks business, which made about €15.7 billion ($17 billion) in revenues in the first nine months of this year.

"We have an enterprise business that we want to scale beyond where it is today," said Igor Leprince, Nokia's executive vice president of global services, during the London briefing. "We want to focus on key enterprises so you will see us talking to web-scale players and banks -- people spending billions [of dollars] in capex."

Pursuing enterprise opportunities more vigorously could put Nokia in closer competition with IP equipment giant Cisco Systems Inc. (Nasdaq: CSCO), which generates the bulk of its sales from the enterprise sector and made about $48.7 billion in revenues in its last financial year (ending in July).

China's Huawei Technologies Co. Ltd. , which continues to increase overall sales despite the unfavorable climate, is also targeting expansion into the enterprise sector, having made about $4.3 billion from enterprise customers in 2015.

Signs of growing competition will obviously be welcomed by enterprise customers but could dent profitability among vendors active in the market.

Nokia is also guiding for an operating margin at its networks business of 8-10% in 2017, up from a forecast of 7-9% this year and a figure of 8% in the July-to-September quarter.

In the long term, however, it believes it can increase the margin to between 10% and 15%. If the market environment and its execution are in line with expectations, it says, the actual figure will be around the midpoint of this range.

"Nokia is extremely well-positioned to win in its primary market with communication service providers, and we aim to target superior returns through focused growth into more attractive adjacent markets where high-performance, end-to-end networks are increasingly in demand," said Rajeev Suri, Nokia's CEO, in a statement.

— Iain Morris, , News Editor, Light Reading