Nokia announced an operational reorganization alongside third quarter earnings on Thursday, as CEO Pekka Lundmark warned of expected financial challenges in 2021 and indicated plans to invest heavily on 5G.
The three-month period marked Lundmark’s first quarter as Nokia CEO, having replaced Rajeev Suri at the beginning of August.
“We have lost share at one large North American customer,” Lundmark said in prepared remarks, possibly referring to Verizon. Rumors surfaced earlier this year that Verizon was considering replacing Nokia as a 5G vendor, and in September awarded a massive $6.6 billion network agreement to Samsung.
Lundmark said Nokia sees some margin pressure in North America and believes it needs to ramp up R&D spending to lead in 5G.
“In fact, we have decided that we will invest whatever it takes to win in 5G,” Lundmark stated. “Our customers are counting on us and we will be there for them.”
Nokia’s profitability was up in the third quarter year over year, but net sales were down 7% versus Q3 2019 due to lower services sales in its Mobile Access group.
Shifting away from end-to-end strategy
As part of an operational reshuffling, Nokia will ditch its “end-to-end” strategy, in favor of a focused approach with four distinct business groups. Each will have P&L responsibility and be charged to lead in their respective sector.
Notably, Nokia sees the chance to gain advantage in “network-as-a-service” business models for telecom operators and enterprise customers, but Lundmark noted that goal will take time to materialize.
“This change offers a broad opportunity for Nokia to provide a trusted, software-led and cloud-based network capability that can be rapidly integrated, deployed, and self-managed as a complete service, allowing us to move up the value chain and provide additional ‘network plus’ value-adding services,” Lundmark said.
Changes to the business groups, effective January 1, 2021, are the first of three phases for Nokia’s new strategy. More details and additional phases will be disclosed on December 16, and at a Capital Markets Day planned for March 18, 2021.
The four new business groups include: Mobile Networks, IP and Fixed Networks, Cloud and Network Services, and Nokia Technologies.
Tommi Uitto, current president of mobile networks, will lead the new Mobile Networks division, which includes the full portfolio for mobile access network customers. It will focus on leadership in 5G, O-RAN, and vRAN.
Federico Guillén, currently president of Customer Operations for EMEA & APAC regions, has been named president of IP and Fixed Networks. That group will include the current IP Routing, Optical and Fixed Networks, as well as Alcatel Submarine Networks business.
Raghav Sahgal, who was appointed to president of Nokia’s Enterprise business in May, will head up the new Cloud and Network Services group. That consists of the existing Nokia Software business, (not including Mobile Networks network management), enterprise solutions, core network solutions, and managed services. Certain products from other business groups will be delivered to enterprise customers via the new business group.
In the third quarter, Nokia Enterprise maintained double-digit growth.
Jenni Lukander will continue to head the Nokia Technologies group, which remains largely unchanged.
Nokia’s also adding a Customer Experience organization, led by Ricky Corker, to work with customers across all business groups.
“Our focused business groups will ensure that we shorten the distance between customers and product development. Our new Customer Experience organization is designed to build on our deep customer relationships. We already have world-class teams and fully intend to keep this as a key strength going forward,” said Lundmark in a statement.
Lundmark joined Nokia after a challenging time for the Finnish vendor, including missteps on 5G chips that drove product costs up. The company has worked to rectify the situation with a new System-on-Chip (SoC) based Powered by ReefShark portfolio, which it expects to help significantly reduce product costs.
At the end of 2019, Nokia’s 5G ReefShark shipments were 10%. In the third quarter, 37% of 5G shipments were from the ReefShark portfolio, and Nokia expressed confidence to meet its overall 2020 target of 35% of shipments.
As for its ‘4G+’/5G market share, Nokia said it continues to be on track for approximately 27% share at the end of 2020, excluding China.
However, Nokia expects impacts to market share in 2021, again citing failure to covert its 4G footprint to 5G with “a large North American customer.” That loss is expected to be partially offset by gains with customers that have increased their focus on security.
At the beginning of October, Nokia announced it hit 100 commercial 5G deals.