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Services Now 45% of NSN Revenues

Ray Le Maistre
7/16/2009
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Nokia Networks , one of the telecom equipment sector's major players, is becoming more of a services company that sells some hardware on the side.

The German/Finnish joint venture, along with Alcatel-Lucent (NYSE: ALU), Cisco Systems Inc. (Nasdaq: CSCO), Ericsson AB (Nasdaq: ERIC), and Huawei Technologies Co. Ltd. , is a major supplier of hardware and software systems to telecom operators worldwide. (See Huawei Closes In on Rivals.)

But as carriers cut back their capital expenditures, and look for ways to outsource more of their operations in an effort to reduce day-to-day costs, so NSN has seen its traditional equipment sales squeezed and its services opportunities grow.

Indeed, NSN believes the potential captive market for telecom outsourcing and managed services is worth €200 billion ($282 billion) a year, double the size of the telecom equipment market. (See NSN Sees Managed Services as $277B Market.)

That balance in value is starting to show in NSN's financials. Commenting during today's earnings conference call, Nokia Corp. (NYSE: NOK) CEO Olli-Pekka Kallasvuo noted that NSN's Services division, which provides carriers with a broad range of outsourcing, integration, consulting, and maintenance services, now generates 45 percent of NSN's revenues. (See Device Depression for Nokia, Sony Ericsson.)

With NSN's second-quarter revenues running at €3.2 billion ($4.5 billion), that puts the Services division's second-quarter revenues at €1.44 billion ($2 billion).

Kallasvuo noted that of NSN's five divisions, Services and Radio Access (mobile access infrastructure) recorded the best sequential growth, while Services boasted the best gross margin growth (though exact figures were not available). (See Vendors Scrap Over Managed Services Deals, NSN Wins Orange Spain Deal, and Embarq Outsources to NSN.)

And as if to highlight the Services division's ongoing potential, NSN today announced a new five-year managed services deal with Brazilian fixed and mobile carrier Tele Norte Leste Partricipacoes SA (better known as Oi) worth €1.1 billion ($1.55 billion). Kallasvuo claims NS is "by far" the market leader in the Latin American telecom managed services market.

NSN isn't the only major vendor benefiting from the growing trend for carrier outsourcing.

Alcatel-Lucent expects its Services business, which has been landing some impressive deals and forging some important relationships of late, to be the only part of its operations that will grow its sales this year. (See Telenet Builds With AlcaLu , AlcaLu in Line to Win Reliance Deal, AlcaLu, HP Combine on IT, AlcaLu, Bharti Form Joint Venture, and AlcaLu Supports BT Global.)

During the first quarter of 2009, AlcaLu's Services business grew by more than 20 percent year on year, and generated just over 22 percent of the vendor's total revenues of $4.8 billion. (See Hard Times for Alcatel-Lucent.)

And Ericsson's Professional Services division generated nearly 26 percent of its first-quarter revenues of $6.2 billion. (See Ericsson Holds Up in Q1.)

Of the major vendors that offer the full range of telecom fixed and wireless hardware and software technology, Huawei is the one that has yet to pump up its services offering. But, as with the other sectors where Huawei has lagged its rivals in the past, it could be just a matter of time before the Chinese vendor is mixing it with its more mature adversaries.

— Ray Le Maistre, International News Editor, Light Reading

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