Nokia's network unit reports sales decline, looks ahead to growth

Nokia (NYSE:NOK) Solutions and Networks' significant win in China Mobile's recent TD-LTE tender put a positive spin on the vendor's third-quarter results, as did an upbeat forecast of future growth, but a slip in sales nonetheless cast a shadow on NSN's ongoing turnaround.

NSN announced that it won the largest non-Chinese vendor share in China Mobile's recent TD-LTE tender, though only by a "low single-digit share."

The company said it was awarded an 11 percent market share consistent with other non-Chinese vendors, but scored an additional small share as a result of selling through resellers also selected by China Mobile. NSN noted the wins give it entry into six new provinces compared to its TD-SCDMA footprint in China.

Separately, NSN announced it won a contract to transform Oi Brasil's network in several regions to a single radio access network (RAN) based on its Flexi Multiradio 10 base station for GSM, 3G and LTE. The vendor will also supply its Liquid Core evolved packet core (EPC) platform and subscriber data management to the Brazilian carrier.

Other upbeat news included NSN's third-quarter 2013 net profit of $133.5 million, an increase of 33 percent over the year-ago quarter.

"We delivered our eighth consecutive quarter of positive free cash flow, the second-highest growth margin in our history, a strong non-IFRS operating margin, our second-highest ever contribution margin in global services and our highest-ever reported net profit," said NSN CEO Rajeev Suri on a conference call with analysts.

However, NSN's year-over-year net sales plummeted 24 percent to nearly $3.57 billion, with some of the decline attributed to business divestments and exits from certain contracts and countries. Even excluding those issues, net sales declined year-over-year by some 20 percent.

"The year-on-year decrease in mobile broadband was primarily due to lower sales in WCDMA, GSM and CDMA. Within mobile broadband, LTE was approximately flat year-on-year as higher sales in North America, Europe and Latin America offset lower LTE sales in Japan and Korea," the vendor said.

Sami Sarkamies, an analyst at Nordea Bank in Helsinki, expressed concern about the decline. "With the unit's sales so far below expectations management may need to make the trade-off and sacrifice some profitability to boost revenue. NSN needs to do much more to lift sales," said Sarkamies, who was quoted by Bloomberg.

Free cash flow was $217.5 million in the third quarter of 2013, compared to nearly $375.9 million a year earlier. Restructuring negatively impacted NSN's latest free cash flow figure.

Nokia forecast higher fourth-quarter sales for NSN and said the unit's expected adjusted profit margin will grow during the fourth quarter to around 12 percent, plus or minus 4 percentage points, from 8.4 percent in the third quarter.

"When we look at the NSN outlook, we can see that there's a really strong final quarter coming," Inderes analyst Mikael Rautanen told Reuters.

At the end of 2013's third quarter, NSN had about 49,100 employees, a reduction of some 11,500 compared to the end of the third quarter 2012.

Nokia has repeatedly been cited as a potential buyer of struggling Alcatel-Lucent (NYSE:ALU), whose infrastructure business could complement NSN's. Analysts have said Nokia's sale of its handset business to Microsoft (NASDAQ:MSFT) for $7.5 billion next year would give the Finnish vendor enough ballast to finance an acquisition of Alcatel-Lucent's wireless business.

For more:
- see this NSN release, this release and this release
- see this Bloomberg article
- see this Reuters article
- see this Wall Street Journal article (sub. req.)

Special Report: Wireless in the third quarter of 2013

Related articles:
Mallinson: Can European wireless vendors reclaim their past glory?
Report: Nokia's cash balance clears way for Alcatel-Lucent buy
Reports: Nokia's board considering NSN deal with Alcatel-Lucent
China Mobile names 9 TD-LTE network vendors
Report: Nokia's networks unit may become a 'mini Ericsson'
Nokia's $7.2B gain could make NSN a powerhouse in the cloud

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