Ethernet equipment

Nokia Siemens Braced for Tough 2009

Nokia Networks might well have completed its restructuring process and strategic rethink just in time to weather the expected storm in the telecom infrastructure market.

Having pre-warned investors, analysts, and the rest of the industry that 2009 was shaping up to be one tough cookie in both the device and network equipment markets, Nokia Corp. (NYSE: NOK)'s management, which gathered in New York late last week for the company's Capital Markets Day, provided a more detailed forecast of just how bad it expects the coming 12 months will be.

Infrastructure inversion
Not surprisingly, Nokia Siemens Networks (NSN) is predicting a shrinking market: It would be madness to suggest anything else given the multiple announcements about spending cuts emanating from network operators. (See Sizing Up AT&T's Cuts (and Chops) , Capex Watch: Telecom Italia Plans Cuts, More Russian Capex Cuts, Capex Watch: Expect Shrinkage in 2009, and Europe Hit With Big Telecom Jobs Cuts.)

The downturn, though, isn't expected to putt the vendor's 2008 numbers into reverse. NSN expects the "mobile infrastructure, fixed infrastructure and related services" market to be flat in euro terms in 2008 compared with 2007.

According to charts shown during the vendor's Capital Markets Day presentations, that means the total market is set to be worth about €115 billion ($149 billion) this year, roughly the same as in 2007 and 2006.

What has shifted during the past few years, though, has been the composition of the market, with slight year-on-year decreases in the value of the wireline equipment market and slight increases in the associated infrastructure services sector. The wireless network equipment market, though, has been holding steady.

That's about to change, however.

NSN believes the 2009 market for network infrastructure and associated services will shrink by at least 5 percent, and very possibly more (in euro terms). That puts the overall value at €109 billion ($141 billion) at best, though it could shrink further -- a 9 percent cut would take it to €104 billion ($135 billion).

And while the vendor expects the services segment to hold firm at around the €40 billion ($52 billion) mark, the wireless infrastructure market is set to decline in value, as is the fixed equipment sector.

The impact on NSN
With the value of the overall market set to shrink, NSN is preparing for decreasing revenues in 2009, though it expects to hold onto its current market share. The company also notes that it's on course to complete the integration process that began when NSN was created in April 2007, and that the annual operating cost savings worth €2 billion ($2.6 billion) a year will be achieved by the end of 2008. (See Instant Revamp for Nokia Siemens.)

That's an important point to make, according to Nomura Securities analysts Richard Windsor and Stuart Jeffrey, who believe the vendor will be able to avoid becoming a loss-making business in the coming few years because it has slimmed down and has a clear business focus.

The Nomura team believes NSN is on course for revenues of €4.38 billion ($5.7 billion) in the fourth quarter of 2008 (which would be down from last year), taking its total revenues for the year to €15.35 billion ($20 billion). That would give it an overall market share of between 13 percent and 14 percent. (See Nokia Siemens Ramps in Q4.)

And, in a research note issued today, Windsor and Jeffrey forecast a dip in NSN's annual revenues of 7.6 percent to €14.2 billion ($18.4 billion) in 2009.

But the analysts also believe the vendor will still manage to generate positive earnings before interest and tax (after restructuring costs and amortization, or "adjusted EBIT") in the coming years.

They forecast "adjusted EBIT" of €767 million ($994 million) for NSN in 2008, followed by €529 million ($686 million) in 2009. Then in the following years that earnings number starts to climb as annual sales volumes creep up.

While Windsor and Jeffrey believe there's some risk in that forecast, they believe NSN's heavy restructuring in the past two years will be followed by further (but far less severe) cost cutting that will continue to reduce the vendor's cost base, so helping its potential profitability. In addition, they believe NSN's focus on selling more software products, cutting its reliance on the sale of equipment sourced from partners, and a "cautious stance on new contracts" will enable NSN to maintain gross margins at around the 30 percent mark.

That "cautious stance" on new contracts -- NSN has stated it won't take on any loss-leading deals -- will likely lead to NSN shedding some market share in the infrastructure market, but will enable it to avoid reporting financial losses, believe the analysts.

Broader impact of slowdown
While NSN looks to be shaping up to weather the coming storm, it's unclear whether its two main rivals, Alcatel-Lucent (NYSE: ALU) and Ericsson AB (Nasdaq: ERIC), are as well prepared in terms of costs and focus. (See Ericsson Soars on Strong Q3.)

Some light might be shed on AlcaLu this Friday, Dec. 12, when relatively new CEO Ben Verwaayen plans to unveil his new corporate strategy following the recent management shakeup. (See AlcaLu Unveils New Leadership Team and AlcaLu's CFO Signs Off.)

— Ray Le Maistre, International News Editor, Light Reading

digits 12/5/2012 | 3:25:38 PM
re: Nokia Siemens Braced for Tough 2009 Yes, you can find info here on webcast and call numbers


gbmorrison 12/5/2012 | 3:25:38 PM
re: Nokia Siemens Braced for Tough 2009 Anyone know if AlcaLu talk will be Webcast? URL?
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