NSN Shrinks Again, But Q2 Looks Rosier

Nokia Networks , which is stuck in something of a financial rut, today reported yet another decline in year-on-year revenues as it reported its first-quarter numbers. (See Nokia Siemens Shrinks 18% in 2009 .)

However, its expectations for the second quarter show signs that its more aggressive market strategy, implemented by CEO Rajeev Suri late last year, might be starting to pay off. (See MWC 2010: Is NSN Bouncing Back?)

The infrastructure vendor, which publishes its financial details as part of parent Nokia's earnings report, generated revenues of €2.72 billion (US$3.62 billion), down 9 percent from a year earlier, and down significantly compared with the fourth quarter of 2010 (as is usual due to seasonal trends). (See Nokia Reports Q1.)

NSN benefited slightly from currency exchange fluctuations: At constant currency rates, NSN's first-quarter revenues would have shrunk 12 percent year-on-year.

Nokia CFO Timo Ihamuotila noted that NSN had experienced particular challenges in India and Russia, where market and regulatory issues have been delaying purchasing decisions.

NSN reported a first-quarter operating loss of €266 million ($354 million), an improvement on a year earlier. Excluding one-time charges and "special items" -- including a €125 million ($166 million) restructuring charge, NSN managed a first-quarter adjusted operating profit of €15 million ($20 million), again better than a year earlier.

Gross margin was 28.8 percent, up from 23.5 percent a year ago, though the CFO noted that the first-quarter margins were unusually high due to a favorable mix of product sales and ongoing cost cuts, and that the rate is unlikely to be sustained in the second quarter.

Table 1: Nokia Siemens Networks Q1 2010

In millions of euros	Q1 2009	Q1 2010	% change	Q4 2009	% change
Revenues	2,990	2,718	-9%	3,625	-25%
Reported operating profit	-361	-226	--	17	--
Adjusted operating profit*	-122	15	--	201	-93%
* Excluding 'special items' and one-time charges

It's the outlook for the second quarter that catches the eye, though, as NSN says it's expecting revenues of €3.1 billion to 3.4 billion ($4.1 billion to 4.5 billion). At the higher end of that scale, that would represent a year-on-year increase compared with the €3.2 billion ($4.25 billion) reported for the second quarter of 2009. (See Slump Slams Nokia Siemens .)

But even at the low end, that would represent a sequential increase in revenues of 14 percent, or an increase of 25 percent if NSN achieves second-quarter revenues of €3.4 billion.

In 2009, the vendor's sequential increase between the first two quarters was 6.7 percent.

That improved outlook could be a sign that the company's new strategy, which includes a focus on increasing market share, is having a positive impact. (See NSN Targets Greater Market Share and NSN CEO: Don't Write Our Obituary.)

Indeed, the vendor today announced new deals with two of China's major operators, while Nokia Corp. (NYSE: NOK) Olli-Pekka Kallasvuo talked up NSN's impact in managed services and the early Long Term Evolution (LTE) market during today's earnings conference call. (See NSN Lands Frame Deals in China, MWC 2010: The LTE G8, NSN Lays LTE Groundwork, and NSN Replaces Huawei in Euro LTE Rollout.)

"NSN continues to generate momentum in key areas," said Nokia's CEO, who cited three new first-quarter LTE deals -- in Sweden and Norway with Telia Company , and another that has not yet been announced. He said NSN now has 10 reference LTE deals, "the highest [number of deals] in the industry," and "25 active trials with customers." (See NSN Tests TD-LTE in Taiwan, Chunghwa Trial LTE With NSN, Telstra Checks Out LTE , Telefónica, NSN Test LTE in Slovakia, M1 Trials LTE With NSN, and TeliaSonera Picks Ericsson, NSN.)

Kallasvuo also cited the decision by French alternative operator Iliad (Euronext: ILD) (Free) to select the vendor as its lead 3G network equipment supplier (radio access, packet core, and applications) as a "testament to the quality of NSN's all-IP offering."

NSN also signed 14 new managed services deals during the first quarter, stated Kallasvuo, including an agreement with NII Holdings Inc. (Nasdaq: NIHD) (Nextel) for the management of its networks in Argentina, Brazil, Chile, Mexico, and Peru.

Managed services generated €1.3 billion ($1.73 billion), or 47.8 percent, of the first quarter's revenues.

"We see NSN stabilizing its business and setting the foundations for future growth. We are encouraged that it has the right strategy for good progress," stated Kallasvuo.

NSN is still expecting the overall market for infrastructure and associated services in 2010 to be roughly in line with 2009, but expects to grow faster than the market and increase its market share.

— Ray Le Maistre, International Managing Editor, Light Reading