NSN starts search for growth

Wednesday 22 January 2014 | 14:57 CET | Market Commentary

As Nokia approaches the completion of the sale of its handset division to Microsoft, attention is shifting to Nokia Solutions and Networks (NSN), which will form the core of the new Nokia. In Q3 2013, NSN's sales contracted by around a quarter and operating profit fell by 9 percent. Still, there are a number of growth opportunities for the division, which will account for around 90 percent of Nokia sales going forward. The graph below shows NSN's sale performance over the past two years.

Figure 1: revenues (EUR bln) Nokia Group, D&S, NSN, HERE (source: Nokia IR).

NSN accounted for 44 percent of revenues in 2012 and 47 percent in the most recent quarter reported, Q3 2013. Pending the definitive sale of Nokia's Devices & Services division, NSN will make up around 90 percent of Nokia's total revenues. As such, the new Nokia will be focused on the sale of network equipment and related services. At the same time, the company plans to grow the contribution from its other divisions, the mapping service Here and Advanced Technologies, which groups its R&D and intellectual property licensing activities. 

NSN: recent highlights

  • At the Mobile World Congress in early 2013, NSN demonstrated offloading data traffic from FDD-LTE to TD-LTE, resulting in a 50 percent increase in data throughput. An earlier NSN test of TD-LTE achieved speeds of up to 1.6 Gbps. TD-LTE has been used more in emerging markets, while FDD-LTE remains more common in developed countries. 
  • NSN renewed its agreement from 2010 with the China Mobile Research Institute (CMRI), the research arm of China Mobile. The two committed to further development of TD-LTE and research into 5G.
Advanced markets: 
  • In the US, NSN won an important contract from Sprint for its LTE network roll-out. This gives NSN access to the top tier of operators in the US market, where it previously only had a limited presence. 
  • NSN is supplying base stations to the South Korean operators SK Telecom, LG U+ and Korea Telecom for the roll-out of LTE-Advanced, which promises speeds up to 150 Mbps. 
  • In Europe, NSN is building LTE networks for customers such as E-Plus (Germany), Orange (Switzerland) and Tele2 (Netherlands). 
  • In Japan, NSN is a long-time supplier of LTE equipment for NTT Docomo, Softbank Mobile and KDDI. 
Emerging markets: 

  • NSN has won part of the contract to build the TD-LTE network of China Mobile, the world's largest carrier in subscriber numbers. Together with Ericsson and Alcatel-Lucent, NSN won 10 percent of the contract worth in total CNY 20 billion (around USD 3 billion). The largest part of the contract went to the Chinese vendors Huawei and ZTE. NSN also has a LTE contract with the somewhat smaller China Telecom. 
  • NSN has also signed LTE contracts in emerging markets with Oi (Brazil), Chunghwa Telecom (Taiwan), Telkomsel (Indonesia) and Vimpelcom (Russia). 
NSN competes mainly with Alcatel-Lucent, Samsung and ZTE for third place in the market, behind leaders Ericsson and Huawei. NSN is focusing on top-line growth, building on the strong demand for LTE networks worldwide.

According to the GSMA, there should be almost 500 commercial LTE networks active in 128 countries worldwide within four years, double the number at the end of 2013. Asia is expected to lead the growth in the number of LTE users, especially China and India, while Latin America is another key growth area. Europe has had a slower start in LTE, but is quickly catching up. 

There are any number of areas for NSN to grow its business. These include small cells, self-organising networks (SON), cloud, VoLTE, customer experience management and 5G development. It could also consider partnerships with other players. Alcatel-Lucent has often been named a candidate, but this appears to be ruled out for the moment. 

Following major restructuring efforts to lower costs and restore profitability in the past two years, NSN is now targeting sales growth. Its operating margin reached 8.4 percent in Q3 2013, versus 5.2 percent a year earlier. Further improvements in the margin may come from expansion of the Global Services unit, which accounted for more than half of NSN's sales in Q3. 

Figure 2: operating result NSN, in EUR mln. (source: Nokia IR). 

NSN is expected to report a 19 percent fall in fourth-quarter sales to EUR 3.2 billion. Over the full year 2013, revenues are estimated down 17 percent to EUR 11.4 billion, according the average of analyst forecasts compiled by Reuters. The decline in sales is mainly due to a number of contracts coming to an end. While this is a bad sign, the company's focus in the past two years has been on improving profitability, and NSN has now been in the black for several consecutive quarters. This suggests it's turned the corner and could return to growth in 2014. 

Ahead of reporting its Q4 2013 results on 23 January, Nokia presented pro forma historical results under its new reporting structure. Devices & Services will now be reported as discontinued activities, while the new structure includes Mobile Broadband/Global Services (NSN), Here and Advanced Technologies (AT). In 2012, AT generated EUR 534 million in revenues, and in the first nine months of 2013, this reach EUR 409 million.

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