October 29, 2015
Nokia CEO Rajeev Suri says the Finnish vendor's imminent takeover of Alcatel-Lucent is already giving it more traction with operators investing in cloud-based networks, citing its inclusion on AT&T's Domain 2.0 program as a clear example of this dynamic.
AT&T Inc. (NYSE: T) launched the Domain 2.0 supplier program in late 2013 to support the investments it is making in SDN and NFV technologies and yesterday announced that Nokia Corp. (NYSE: NOK) had been added to the list of approved suppliers.
Speaking to analysts after Nokia published third-quarter results earlier today, Suri rebuffed a suggestion that Nokia should have acquired Alcatel-Lucent (NYSE: ALU)'s mobile networks division instead of the whole business, emphasizing the importance of IP and software products to Nokia's future.
"The deal is more about scope than scale and we're already seeing that relevance and access to converged operators is increasing, with AT&T Domain 2.0 one example of that," he told analysts. "Mobile infrastructure and services is flattish but the combined portfolio allows us to address a much larger market growing at a compound annual growth rate of 3.5% in the long term."
Suri said that growth would be driven by interest in IP networks as well as applications and analytics, and that Nokia's takeover of Alcatel-Lucent would allow it to target new cloud and enterprise customers.
The company has now secured all of the regulatory approvals it needs to move ahead with the €15.6 billion ($17.1 billion) deal and expects to close the transaction in the first quarter of 2016. (See Nokia Makes €15.6B Bid for Alcatel-Lucent.)
Shares in both Nokia and Alcatel-Lucent received a boost on Thursday after the Finnish equipment maker said it would be able to achieve its merger-related goal of saving €900 million ($988 million) in operating costs by 2018 instead of 2019, as originally planned.
Nokia also unveiled plans to return €4 billion ($4.4 billion) to shareholders in the form of dividends and share buybacks as part of a new €7 billion ($7.7 billion) program aimed at improving its capital structure.
Nokia's share price was trading about 9% higher in Finland by 3.50 p.m. while Alcatel-Lucent's was up by the same amount in Paris.
The increases came even though both companies flagged revenue declines, in constant-currency terms, during the third quarter, with Alcatel-Lucent blaming impairment charges at its submarine networks business for a widening of net losses.
Nokia's revenues fell by 2%, to €3.04 billion ($3.3 billion), compared with the same period last year, and were 10% lower on a constant-currency basis.
The profitability figures were more encouraging, however, with efficiency measures helping the company to grow its operating margin to 15.6%, from 14.8% in the year-earlier quarter.
"Pricing pressure remains intense and we've walked away from some deals because winning would be another form of losing," said Suri. "Profits have been driven by cost discipline and operational excellence."
Although Suri expressed some disappointment with the overall performance of the mobile broadband business, investors will have been satisfied that Nokia continues to prosper in the vast Chinese market, where rival Ericsson AB (Nasdaq: ERIC) last week blamed a 4G slowdown for earnings setbacks. (See Ericsson Slumps on China, Russia Weakness.)
Nokia's sales in China rose by 27% on a year-on-year basis, to €489 million ($536 million), in the third quarter. "There is a common assumption that China will slow down in 2016 and that may be true but we see an opportunity because of our position as the largest non-Chinese vendor," said Suri. "We've also been able to get a new customer in the shape of China Telecom."
Suri reckons Nokia has been able to flourish in China partly because it invested at a much earlier stage than its rivals in TD LTE technology, the 4G variant that is being rolled out by China Mobile Ltd. (NYSE: CHL), the country's biggest mobile operator.
For more NFV-related coverage and insights, check out our dedicated NFV content channel here on Light Reading. Alcatel-Lucent also highlighted success in key areas, including the core networking business that appeared to pique Nokia's interest in acquiring Alcatel-Lucent in the first place. Overall sales rose by 5%, to €3.4 billion ($3.7 billion), but dropped by 6% in constant-currency terms, while core networking revenues were up by 11%, to €1.6 billion ($1.8 billion), and by 2% on a constant-currency basis. "The share of revenues generated by all next-generation products continues to expand and represented 77% of revenues in the third quarter versus 66% in the same period last year," said Jean Raby, Alcatel-Lucent's CFO, during a call with analysts. Unfortunately, the French player was hit by an impairment charge of €193 million ($212 million) at ASN, an underperforming submarine business it has failed to offload, and its net loss increased to €206 million ($226 million) from €18 million ($20 million) in the year-earlier quarter as a result of that writedown. Like Nokia, however, Alcatel-Lucent has also been working on improving its operational efficiency and saw its operating margin increase to 6.2% from 5.2% in the year-earlier quarter. Sweden's Ericsson claimed to have grown its operating margin from 6.7% to 8.6% when reporting its own third-quarter earnings last week. — Iain Morris, , News Editor, Light Reading
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