Nokia saw progress for its flagship Lumia and Asha handsets in the third quarter, which helped reduce operating losses in its Devices & Services unit (see separate item). But of course, that division will soon be Microsoft’s problem, and between now and final approval of the sale, will be treated as discontinued operations by its parent. So in what Nokia interim president and CFO
Timo Ihamuotila called ‘among the most transformative quarter in our company’s history’, all eyes were on the activities that will remain ‘ NSN (Nokia Solutions and Networks), the Here mapping business, and the Advanced Technologies unit which houses the patents and R&D.
Nokia has been through several transformations in its history, including the biggest of all, from the rubber and paper sectors into a single-minded focus on mobile technology. Now it will cast off its long history in handsets, which has largely been seen as a case of unloading a major burden at last in order to concentrate on areas where it still has a good chance of growth and leadership. ‘Subject to the deal with Microsoft closing, Nokia’s earnings profile and financial position are expected to strengthen significantly,’ Ihamuotila said on the analyst call.
The Q3 results indicate that this will not be an easy path however. Nokia has self-evident strengths in the three areas where it still operates. In mapping, the cloud-based Here service has a significant opportunity to hit Google Maps and create a modern web business of its own, but given Nokia’s lack of experience here, it will do better to partner with the online giants (as it has with Amazon) than try to make Here into a new Facebook.
It obviously has major revenue potential from its vast pile of patents, and will continue to add to that ‘ and pursue the spoils more aggressively, as its recent, formerly uncharacteristic, legal actions have indicated.
The biggest question mark still hangs over NSN, the largest business and itself recently free of the burden of Siemens’ co-ownership. It has recently managed to turn in quarterly profits again and win some high profile contracts, including the breakthrough TD-LTE deal announced this week with Sprint (see separate item). Having lagged behind Ericsson and Alcatel-Lucent in the first wave of top tier LTE roll-outs, especially in the US, and behind Huawei in some key European and Asian markets, it is shining more brightly in the current second wave of 4G deployments. This may be good timing ‘ as Ericsson has indicated, the tide is starting to turn, especially in Europe, from low margin modernization projects towards more profitable capacity build-outs, so NSN may hope to follow the Sprint pattern elsewhere too ‘ excluded from the first, coverage and modernization, stage, and stepping in to boost capacity by touting its flexible Liquid Network and its TDD credentials.
Its latest deals, revealed this week, have come from Brazilian carrier Oi, and another TD-LTE win, at China Mobile. The former operator has contracted NSN to supply LTE and upgrade national GSM and 3G networks using its Flexi Multiradio RAN architecture. NSN will also supply the subscriber data management platform plus services such as network planning and optimization, systems integration and maintenance. In China, NSN has gained an 11% share of Mobile’s huge TD-LTE award, alongside other vendors including Ericsson, Huawei, ZTE and Alcatel-Lucent. NSN has expanded its footprint with the carrier, and will supply six new markets in addition to those where it provides TD-SCDMA kit. It will roll out its Flexi Multiradio 10 base stations in 1.9GHz, 2.3GHz and 2.6GHz and will support part of the network in TD-SCDMA /TD-LTE dual mode, with the option of on-site software upgrade to 3G/4G. NSN says it is the only non-Chinese vendor to support this option with Flexi.
However, these signs of progress are not yet translating fully into solid quarterly results. In Q313, sales slowed at both NSN and Here. NSN saw an operating profit of €166m, down 9% year-on-year, on sales of €2.59bn, down 26%. While the latter is to be expected, since its ongoing restructuring is designed to reduce its size and focus only on mobile broadband, it is also supposed to be improving profitability. Nokia also warned that NSN had seen ‘reduced wireless infrastructure deployment activity, which affected both Mobile Broadband and Global Services, and the net negative effect of foreign currency fluctuations’.
‘While we are absolutely not satisfied with our topline performance, the decline needs to be put in the context of our overall evolution,’ said NSN’s CEO Rajeev Suri. ‘2012 was a year of deep restructuring with sharp reductions in personnel and other costs across the company. 2013 has been about transforming how we operate in driving permanent structural improvements while also completing some further restructuring actions. Bluntly put, over the past two years our priority has been fixing operational issues sharpening our portfolio and building a strong financial position.’
Now, turnaround next year will rely on LTE and multimode, as well as the results of R&D investments in emerging technologies such as software defined networking, small cells, packet core and OSS.
The Here unit reported operating profit of €14m, compared with a year-ago loss of €56m, on sales of €211m, down 20%. At a group level, Nokia reported a loss attributable to equity holders of €91m, compared with €959m in the prior year period, on sales of €5.66bn, down from €7.24bn. Its operating profit was €118, compared with a year-ago loss of €564m.
Nokia sees the automotive and enterprise sectors as the chief short term growth opportunities for Here and also highlighted plans to build a full platform around its augmented reality offering for handsets, LiveSight. ‘We are investing in location services that leverage the multiple sensors in mobile devices together with location data, social data and predictive analytics to create new consumer experiences,’ Ihamuotila said. Nokia has enterprise deals with Oracle and SAP for its maps and wants to pursue this kind of high value base, rather than emulating Google’s advertising and consumer driven approach to maps. ‘Compared to Google’s less flexible and advertising-driven approach, we believe Here’s strategy is far better aligned with the needs of a broad range of existing and future customers who are developing their own future cloud-based services,’ said the CFO.
Advanced Technologies is not yet a unit in its own right, so its financials were not broken out, but Ihamuotila said it brought in around €500m a year in revenue, not including the €1.65bn it will get from Microsoft for patent licences once the deal closes. Nokia said it will grow these revenues further by chasing ‘unlicensed’ companies and claiming fees for patents which it did not choose to license before. ‘Subject to the closing of the transaction with Microsoft, we will have further flexibility in making many of these technologies available to the broader market which will provide us with new technology creation and licensing opportunities that have not yet been captured in our current revenue run rate,’ Ihamuotila said.