Nokia’s revenue and profit were significantly hampered by lower demand for its Mobile Networks products and heavy restructuring charges, respectively. TBR does not believe Nokia’s lackluster results indicate unforeseen integration challenges with Alcatel-Lucent are on the horizon, but present clearly that integration will be costly. Restructuring charges incurred in Q2 2016 are a harbinger of significant headcount reductions in H2 2016.
Nokia’s addressable market will be flat at best in H2 2016, but with portfolio rationalization occurring in Mobile Networks and a conscious effort to maintain margins – which TBR believes could include avoiding some low-margin deals – revenue is poised to decline. Additionally, Nokia’s growth will be hampered by the adverse financial situations at key customers such as Sprint and Oi. Sprint is cutting Capex spend to cope with falling cash reserves and Oi is going through bankruptcy, causing payments to be deferred.
Cable becomes a target market following the acquisitions of Alcatel-Lucent and Gainspeed
Fueled by its recent acquisitions of Alcatel-Lucent and Gainspeed, Nokia is ramping up efforts to drive revenue in the cable market, an area in which the vendor previously had minimal exposure. As capex from telecom operators is declining, Nokia is expanding its presence into adjacent markets to diversify its customer base. Nokia will position its IP and optical solutions to gain traction and support cable operators’ desires to build out fiber and leverage new services. Nokia notes it has ongoing engagements with nine of the top ten cable operators in the U.S., which is a vital foothold it can leverage to scale up.
Acquiring Gainspeed gives Nokia critical virtual converged cable access platform (vCCAP) technology, an industry-recognized solution which disaggregates software functionality from traditional hardware. While cable operators lag on the NFV and SDN adoption curve, they are expected to increasingly adopt virtualized infrastructure over the next several years, enabling Nokia to offer a virtualized solution to the cable industry ahead of competitors. Nokia will contend with competitors such as Cisco and Arris, which dominate the traditional CCAP market.
Nokia faces a stiff challenge to grow its standalone software business
As with most other major ICT vendors, Nokia is increasing its exposure to standalone software. This transition will be difficult to execute, specifically because most of the software Nokia (and Alcatel- Lucent) historically brought to market has been closely tied to its hardware. Investments in the space take time to cultivate and install bases need to be built up. Nokia would be best served acquiring software firms, as close competitors Ericsson and Cisco have been doing, to accelerate its business mix shift and segue into new areas.
Nokia’s shift to standalone software is slower than its aforementioned rivals, but the company is beginning to acquire to close that gap. In April, Nokia closed its acquisition of Nakina Systems, a supplier of security and orchestration software for virtual networks.
TBR expects more tuck-in acquisitions to follow, but Nokia’s cadence will remain lower than rivals as it executes the integration of Alcatel-Lucent. TBR believes areas of particular relevance to Nokia include analytics, security, automation software to support service delivery, and management and orchestration (MANO) platforms to drive NFV and SDN initiatives.
Michael Soper, analyst at TBR