Nokia Siemens' Q1 sales drop 7%, but firm promises improvement

Nokia Siemens Networks reported a drop in first-quarter sales and a negative operating margin, but the joint venture promised an improvement in its margins in the second quarter as it continues its restructuring program.

The network infrastructure vendor is undergoing a major restructuring to focus on mobile broadband and plans to slash up to 17,000 jobs by the end of 2013 to save $1.3 billion. In the first quarter, Nokia Siemens reported net sales of $3.85 billion, down 7 percent from $4.14 billion in the year-ago period. NSN reported an operating loss of $1.3 billion in the quarter, compared with an operating loss of $185.8 million in the year-ago period, though the company noted that because it completed the acquisition of Motorola Solutions' (NYSE:MSI) networks business on April 30, 2011, its first-quarter results are not directly comparable to last year.

The vendor had an operating margin of -5 percent, compared with around break-even in the year-ago period, and NSN said it expects its margin the second quarter to "clearly" improve.

"Due to the nature of the restructuring program as well as prevailing uncertain macroeconomic conditions, the timing of improvements in profitability is uncertain and therefore Nokia Siemens Networks' non-IFRS operating margin in 2012 is expected to be volatile," the company said.

Thomas Langer, an analyst at WestLB in Dusseldorf, told Bloomberg that Nokia Siemens "has to show in coming quarters that it can attain a margin of more than 5 percent. As long as they can't show that it will remain a ball and chain for Nokia."

NSN said that its year-over-year decrease in net sales was driven primarily by a decline in sales of infrastructure equipment, which more than offset a slight increase in sales of services. Nokia CFO Timo Ihamuotila noted that services made up roughly more than half of NSN's sales in the quarter.

NSN recognized $1 billion in restructuring charges in the first quarter, and total restructuring charges to Nokia could top $1.3 billion before the end of 2012. NSN, which recently appointed telecom industry veteran Samih Elhage to the newly created position of COO, said cash preservation is a clear priority, and that the company intends to be self-funding in all aspects of its operations. Nokia Siemens said the restructuring program, combined with the company's focus on improving its financial performance, is designed to enable the company to end 2012 with higher net cash than at the end of 2011.

Looking ahead, NSN's prospects may brighten, according to TBR analyst Michael Soper. "After missing the initial LTE investment cycle at Verizon (NYSE:VZ), AT&T (NYSE:T) and Sprint (NYSE:S) , NSN will get another chance to crack the U.S. Tier 1 LTE market when T-Mobile solicits contract bids," he wrote in a research note. "T-Mobile USA uses 3G equipment from Ericsson (NASDAQ:ERIC) and NSN, making NSN one of the frontrunners for the upcoming multi-vendor buildout."

Soper also said NSN will try to win small cell business from Verizon and AT&T, which will need to supplement LTE coverage and capacity in densely populated areas. "NSN's new Flexi Zone product of integrated small cells could attract the operators' attention, but both are entrenched with Ericsson and Alcatel-Lucent (NYSE:ALU), which have small cell offerings of their own," he wrote. "NSN is unlikely to win with AT&T and Verizon, as both tend to be loyal to their current telecom equipment suppliers."

For more:
- see this Nokia earnings article
- see this release
- see this Bloomberg article

Special Report: Wireless in the first quarter of 2012

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