Nokia Siemens Networks' strong first-quarter 2013 results appear to place it firmly on the path toward becoming independent of parent companies Nokia (NYSE:NOK) and Siemens.
NSN achieved underlying profitability for the fourth consecutive quarter and positive cash flow for the sixth consecutive quarter. The vendor reported an operating profit of $4 million for the most recently ended quarter vs. an operating loss in 2012's first quarter of $1.31 billion. Non-IFRS operating profit of $255.87 million was an improvement over the prior-year period's non-IFRS operating loss of $190.59 million.
"External market share data continues to reinforce that NSN has become one of the top vendors in LTE, which is where we believe the attractive growth and margin will be in the coming years. Furthermore, during Q1, NSN successfully placed an €800 million ($1.03 billion) bond with no recourse to its parents, solidifying its liquidity profile and demonstrating progress toward becoming a more independent entity," Stephen Elop, CEO of Nokia, told financial analysts during the Finnish vendor's quarterly earnings conference call.
The NSN partnership agreement between Nokia and Siemens officially expired this month. Both parent companies have agreed to continue running their joint venture, while Siemens seeks a suitable exit. Analysts have suggested Nokia could ultimately sell its interest in NSN, find a new partner or initiate an initial public offering for the infrastructure business.
"The handset vendor is more likely to wait for NSN to continue to build market value before offloading its stake to a third party or spinning it off in an IPO. Nokia is unlikely to purchase Siemens' share as Nokia is embroiled in a massive restructuring of its own, said Michael Soper, research analyst, at Technology Business Research.
He added the most likely scenario would entail Siemens selling its stake to a third-party vendor, "although Alcatel-Lucent (NASDAQ:ALU), Ericsson (NASDAQ:ERIC) and Huawei can all likely be excluded as possible suitors." Soper said it is likely an IT-focused vendor that wants to increase its prominence in the telecom infrastructure space would be interested in Siemens' NSN stake.
"We will continue to look at NSN in a prudent and pragmatic way with the aim of maximizing value for our shareholders," said Timo Ihamuotila, Nokia CFO, who noted NSN is now "self-funding in all aspects of its operations."
In response to a question regarding NSN's future operating prospects, Ihamuotila acknowledged that some major NSN projects in Asia are wrapping up. "Simultaneously, NSN has improved its position in North America, which is a growing market, and we feel that is an opportunity for NSN."
The vendor is one of T-Mobile USA's primary vendors for its $4 billion network modernization program. It also provided radio access network (RAN) and mobile management entity (MME) equipment in 11 markets for U.S. Cellular's (NYSE:USM) second wave of LTE launches, which occurred in late 2012.
NSN's mix of large customers is more diverse than it was 12 months ago. "As their success with LTE with multiple large customers expands, the manageability of the revenue level and the risk of a single customer drying up is reduced," said Elop.
NSN continues to restructure its business with a focus on profitability. At the end of 2013's first quarter, the vendor counted some 56,700 employees, a reduction of 11,900 compared to the year-ago quarter.
The company is facing higher restructuring charges, however. NSN now expects cumulative restructuring-related cash outflows of $1.83 billion before the year's end. This is $130.54 million more than were previously estimated. By the end of the quarter, NSN had expensed some $1.04 billion related to restructuring.
NSN continues being a shining star for struggling Nokia. During 2013's first three months, Nokia Group's net cash position improved by $156.57 million sequentially, with NSN contributing some $274.07 million, showing how important the infrastructure business has become to Nokia's survival.
NSN benefited from a robust gross margin, which was 34 percent, and reported a non-IFRS operating margin of 7 percent. Increased non-IFRS gross margin in the first quarter 2013 was primarily due to a higher gross margin in mobile broadband and global services, as well as a higher proportion of mobile broadband within the total sales mix.
NSN's net sales decreased 30 percent sequentially to $3.65 billion, reflecting industry seasonality. A year-on–year decrease of 4.8 percent in net sales during the first quarter of 2013 was primarily due to divestments of businesses inconsistent with NSN's strategic focus as well as the exiting of certain customer contracts. Excluding these two factors, NSN's net sales in the quarter declined by about 1 percent as lower net sales of global services were almost entirely offset by higher net sales in mobile broadband. At constant currency, NSN's net sales would have decreased 4 percent year-on-year.
NSN suffered lower net sales in Europe and Latin America, which both generated lower net sales in mobile broadband. North America, however, drove higher revenues for NSN, which enjoyed regional growth in both mobile broadband and global services net sales.
During 2013's initial quarter, global services represented 51 percent of NSN's net sales, down from 52 percent a year earlier. The year-on-year decline in global services was primarily due to lower net sales in professional services and care.
Mobile broadband generated 44 percent of NSN's net sales during the recently ended quarter, up from 41 percent in the year-ago quarter. The increase in mobile broadband was primarily due to higher LTE net sales, partially offset by lower WCDMA and voice and IP transformation net sales.
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Article updated on April 18, 2013, to add analyst comments.