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Siemens Spawns a Problem Child

Siemens AG (NYSE: SI; Frankfurt: SIE) CEO Klaus Kleinfeld says his company has two problem children -- one of them is telecom business unit Siemens Communications Group (Com).

Of the company's 12 business units (including power, water, and health systems, among others), the CEO picked out the Com group, and IT services division Siemens Business Services (SBS), for special attention in today's conference call.

Why? Because they dragged down the company's 2005 operating profit, which dipped by nearly 9 percent to €4.7 billion (US$5.5 billion). The company's total revenues for the year were €75.4 billion ($88.2 billion). (See Siemens Reports Q4, Full Year.)

The vendor's management is "unsatisfied" with the Com group's performance, which reported a decline in operating profit for 2005 to €454 million ($531 million) from €707 million ($827 million) in fiscal 2004. "Our results were heavily burdened by SBS and Com," noted the CEO. Revenues were €13.14 billion ($15.4 billion), up 3 percent from 2004.

That decline in operating profit was caused by a lower profit margin of 3.5 percent in 2005 from 5.6 percent in 2004. The cause? Massive pricing pressure in Enterprise Networks and severance charges in the Fixed Networks business countered the major contribution of the mobile network infrastructure business, which made a "strong contribution" to sales and earnings.

"We built a good position in 2G, and now we're doing well in 3G with our partner NEC Corp., signing up a new customer almost every month," said the CEO. (See Vontu Joins CSIA, T-Mobile Taps Siemens , 3 Ireland Picks NEC, Siemens, and Siemens Supplies Maxis.)

But Kleinfeld noted that Com was one of the two divisions to be off course to meet its margin target, which is between 8 and 11 percent by the end of fiscal 2007.

But revenues did increase and were 2 percent higher in the fourth quarter, at €3.7 billion ($4.33 billion). The quarter's operating profit, was down more than 80 percent at €53 million ($62 million), though this was actually better than the loss expected by analysts.

So what will Siemens do? "Clearly, action is needed," said Kleinfeld, including further restructuring. In addition, the group's new management will increase its capabilities to provide managed services, and invest in innovative IP solutions, such as VOIP and home entertainment products. (See Siemens Hires Alcatel Exec, Siemens Unveils VOIP Package, Siemens Cuts IT Services Jobs, Siemens Invests in GlooLabs , and Siemens Wins Thailand VOIP Contract .)

These actions should help the group face up to the challenges posed by sector consolidation, the technology shift to IP, and price erosion. Oh, and the big one -- convergence!.

"It's clear even to the brain dead that convergence is very real and driving the marketplace. This is no longer just a trend -- this is mainstream," stated Kleinfeld, who added he was glad that Siemens had converged its fixed and mobile units last year. (See Siemens Converges in Venice.)

And it's not as if the fixed business is without its merits, added the CEO. "We have made great inroads in new markets driven by IP. Our VOIP technology has been very well received, and we are playing a positive role in IPTV. Those are the future markets, but they might not be the same size as the markets we've been in before." (See Siemens Boasts IPTV Success and Siemens Unveils 21CN Partners.)

Kleinfeld says there is a defined strategy for the Com group, but he couldn't talk about it, as he didn't want to give away too many details.

— Ray Le Maistre, International News Editor, Light Reading

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