Nokia's Enterprise Push Is Adding €180M in Annual SalesNokia's Enterprise Push Is Adding €180M in Annual Sales
Kristian Pullola, Nokia's chief financial officer, says enterprise activities are offsetting a decline at the mainstream telecom business as he prepares for a new round of cost cutting.
October 29, 2018
Nokia's fledgling enterprise business already generates about €1 billion ($1.14 billion) in annual revenues and is now growing at a rate of 18% each year, ahead of Nokia's 13% growth forecast for the entire addressable market over the next five years.
Kristian Pullola, Nokia's chief financial officer, says enterprise activities have offset a decline in the traditional telecom business and currently account for about 5% of total network sales.
The update comes two years after Nokia Corp. (NYSE: NOK) said it would target several markets outside but "adjacent to" the telecom sector. Those markets included energy, transportation, the public sector, so-called "technological extra-large enterprises" and the web-scale players. At the time, the Finnish vendor said they were collectively worth about €18 billion ($20.5 billion) annually and would grow at a five-year compound annual growth rate (or CAGR) of 13%. (See Nokia to Create Standalone Software Biz, Target New Verticals.)
The strategy made sense, according to Nokia, because the main telecom market, worth an estimated €113 billion ($129 billion) each year, would grow at a CAGR of just 1% over that same period.
But as the enterprise activities get bigger, the enterprise strategy is moving up the agenda. In a restructuring move announced last week, Nokia is setting up a distinct enterprise business group that will pool efforts and make success or failure far more visible to shareholders. Kathrin Buvac, Nokia's chief strategy officer, will take charge of that group.
"We said we would expand into the enterprise space. We've done that within the traditional set-up and now is the time to dedicate an organization to go after the next leg of that opportunity," said Pullola during an interview with Light Reading last week, shortly after Nokia had published its third-quarter results. "There are about 4,000 enterprises we want to go after with telco-grade network gear." (See Nokia Warns of Job Cuts in €700M Shake-Up.)
Figure 1: Kristian Pullola, Nokia's chief financial officer, is already feeling a boost from his company's move into new enterprise markets.
While the enterprise push might seem to have had little impact on Nokia's top line so far, Pullola's comments indicate that results would have been much worse if it had not happened. Sales at Nokia's networks business are down 5% for the first nine months of the year, to about €13.9 billion ($15.9 billion), compared with the year-earlier period (although Nokia says revenues were stable in constant currency terms).
"We've seen in the last two years a decline in traditional operator business, which has been visible in overall numbers," said Pullola.
Along with fierce rival Ericsson AB (Nasdaq: ERIC), Nokia is now seeing the light at the end of the telco tunnel, as major service providers in North America start to invest in next-generation 5G networks. Organic sales growth at the networks business hit 3% for the recent third quarter, and that unit's operating margin soared to 5%, from just 1.5% in the previous three-month period. But Nokia needs a dazzling final quarter to hit its networks margin target of between 6% and 9% for the year. (See Ericsson Corruption Scandal Sullies Strong Q3.)
"Clearly, with a big fourth quarter ahead of us, there is some risk on the execution side on project timing and deliveries," Pullola admits. In a detailed commentary on its outlook, Nokia acknowledged that its ability to scale supply chain operations and procure certain components to meet demand levels is a concern.
When it comes to the enterprise push, one of the big challenges for Nokia is to ensure it has the right sales channels to address non-telco sectors. Buvac had promised investment in those new channels when she spoke with Light Reading at the end of 2016. Recent earnings reports suggest most business so far has come from web-scale players buying new optical products. Revenues at the optical networks business rose 25% in the recent third quarter, to €412 million ($470 million), making it the fastest-growing of all Nokia's operations. The formation of the enterprise business group might give Nokia the sales and marketing focus to address other types of customer. (See Nokia's New Software Unit to 'Redesign' Company.)
Next page: Hard times for telecom workers
Hard times for telecom workers
Elsewhere, major cuts are planned as Nokia looks to reduce annual costs by around €700 million ($799 million) in the next two years, including around €500 million ($570 million) in operating costs. Under an existing program, Nokia is already aiming for €1.2 billion ($1.4 billion) in annual cost savings by the end of this year, compared with 2015. But in the current market environment, Nokia appears to have realized it will miss profitability targets without even heftier cuts. Its 2020 goal is for an operating margin at the networks business of between 9% and 12%.
Executives have acknowledged this new savings plan will have a big impact on staff numbers. Nokia finished 2017 with about 103,000 employees but had an average of 101,731 on its books across the year, paying out roughly €6.5 billion ($7.4 billion) in staff costs, according to its last annual report. That equals about €64,000 ($73,000) per worker.
To realize €500 million ($570 million) in savings from headcount reductions would, therefore, entail nearly 8,000 job losses. Nokia, however, says it can also make cuts in other areas, such as the real estate footprint. So just how many jobs are under threat?
"I will not speculate about how large the headcount cuts will be," said Pullola. "We'll go after cost reductions and not just headcount. We have other pools of savings. But clearly, once you aim for this large reduction, you need to go after efficiencies on the headcount side, and that is what we're assessing."
When it comes to headcount, automation and process improvements should deliver savings in various support functions. In the meantime, the transition from 4G to 5G will allow Nokia to slash investments in certain legacy products, according to Pullola.
That means overall spending on R&D will also fall. The strategy contrasts markedly with that of Ericsson, which has channeled extra spending into R&D even as it makes cuts elsewhere. Pullola insists Nokia will not be cutting R&D expenditure in the important areas. (See Ericsson's R&D Workout Piles 5G Pressure Onto Rivals.)
"We will be spending more on 5G R&D and related areas in future," he said. "Within R&D we will be doing less on legacy and get a net reduction on that."
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Further restructuring, on top of the formation of the enterprise business group, could improve the R&D focus. From early next year, the Nokia Software division, which made €363 million ($414 million) in sales for the recent third quarter, will be responsible for the development of core network products, as these increasingly take the form of clever software programs. "That will enable the mobile networks business group to focus on radio during the 5G ramp-up period," said Pullola.
The overhaul will make direct comparisons of 2018 and 2019 results much harder, he acknowledges. "There is going to be a shift in revenues and earnings from one bucket to another," he said.
Nevertheless, from an investor perspective, Nokia is probably a more enticing prospect these days than Ericsson. The Swedish company's share price has soared 46% since early 2017 as it has clawed its way back to profitability, and this month it reached its highest level since November 2015. That year, however, Ericsson's sales were the highest they had been in 15 years, and its operating margin was a respectable 9% compared with the 2.1% it managed for the first nine months of this year. Even with the improvements it expects and seems likely to realize, Ericsson may have nearly peaked. (See Have We Reached Peak Ericsson?)
Nokia has seen no such boost. Since January 2017, its stock has risen as little as 2.3% in Helsinki, as investors have waited patiently for the start of the promised 5G spending cycle. If Nokia can hit its full-year guidance, its shareholders might enter 2019 on a high.
— Iain Morris, International Editor, Light Reading
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