Focus on mobile broadband will enable NSN to generate positive operating margins

Telecom Lead Europe: Margins remain pressured during
NSN’s restructuring process due to increased competition in core markets, but
NSN will grow stronger by 2013.

Nokia Siemens Networks continues to work through a
difficult restructuring process that includes selling business units and
reducing headcount to save the company €1 billion by the end of 2013. As the
focus shifts to its three core businesses of mobile broadband, customer
experience management (CEM), and services, NSN experienced an 8.2% drop in
revenue. The company remains mired in operating losses, as it takes on charges
related to its restructuring initiative. In 2Q12, operating margin fell 380
basis points year-to-year to -6.8%. The company also faces a tough competitive
environment in which telecom equipment vendors are increasingly competing on
price. Chinese vendors Huawei and ZTE are causing margin erosion in the
industry and making inroads with European telecoms that form a large part of
NSN, Ericsson, and Alcatel-Lucent’s business.

In light of the competitive landscape, NSN’s gross margin
declined 100 basis points year-to-year to 24.9%. To combat pressure on its
gross margins, NSN is increasing its focus on developed markets, including
North America, Japan, and South Korea, where contract profitability is
typically higher and demand for higher-value services and software is ramping
up. NSN will be able to differentiate itself from competitors with its CEM
focus, which will emphasize operator accessibility and analytics. Inexpensive
vendors such as Huawei and ZTE have a less-developed CEM strategy at this time,
as they are focused on selling low-priced equipment and bringing their services
capabilities closer to the levels of their Europe-based rivals.


NSN capitalized on its last chance to win LTE business
from a Tier 1 U.S. operator, scoring a portion of T-Mobile’s LTE rollout

NSN, along with Ericsson, won T-Mobile USA’s LTE network
buildout in May 2012. After being shut out from LTE contracts at T-Mobile’s
three larger rivals, NSN had fallen further behind dominant U.S. vendors
Alcatel-Lucent and Ericsson. NSN was likely to receive at least part of the
contract, as it is a key supplier to T-Mobile’s HSPA+ network. NSN and Ericsson
will roll out equipment at 37,000 sites for the upcoming LTE, network, which
will be turned on in 2013.

Though progress is slow, and its North American business
is slumping (down 3.5% year-to-year in 2Q12), NSN remains committed to the
region. The company’s position in the marketplace improved in the last year
following the acquisition of Motorola Networks, but Ericsson and Alcatel-Lucent
continue to win a larger share of business from the top three operators.
Winning the LTE deal from T-Mobile USA, coupled with its U.S. small cell
strategy, in which NSN will try to score small cell business from AT&T and
Verizon, indicates that the company recognizes the importance of the Tier 1s,
but TBR believes Ericsson and Alcatel-Lucent are too entrenched in the market
to be pushed out.


NSN’s reseller agreement with Ruckus Wireless lends
further credence to the idea that Wi-Fi will play an increasingly important
role in carrier network plans

In May, NSN announced that it would resell Wi-Fi
equipment from carrier Wi-Fi company Ruckus Wireless. Ruckus is a direct
competitor with BelAir Networks, which Ericsson acquired in April 2012.
Operators are increasingly voicing their support for Wi-Fi technologies, as they
look to relieve the strain that smartphone usage is placing on their cellular
networks. NSN’s small cell portfolio is set to include support for Wi-Fi, as
its Flexi Zone picocell will be available for commercial use in 1Q13. Flexi
Zone, which supports Wi-Fi, LTE, and HSPA+, is a cluster of integrated small
cells that act as a single base station. Ruckus likely collaborated with NSN on
Flexi Zone’s development, though there is no indication that Ruckus technology
will be directly integrated with NSN’s small cell products.

Michael Soper, Networking & Mobility Research Analyst
[email protected]