Nokia Siemens Networks ("NSN"), a leading equipment,
infrastructure and service provider for telecom networks
globally, is now concentrating on the U.S. market, which has so
far been its weakest business zone. Formed in 2007 as a 50-50
joint venture between
), NSN currently is the second largest global telecom equipment
gear maker. Despite the reputation, it was only in the third
quarter of 2012 that NSN achieved its first operational
Incurring Losses since Inception
We attribute a number of reasons behind the losses incurred by
NSN. First and foremost, though NSN boasted of a strong GSM
portfolio, it had lacked severely on the CDMA front. We note that
CDMA is the dominant network protocol used in the lucrative North
American region. Added to it was cut-throat competition from
emerging low-cost Chinese vendors like Huawei Technologies and
ZTE Corp. Their low bids for network infrastructure contracts
gave NSN a run for its money. The company had also diversified
into many non-lucrative segments, such as microwave-transport and
fixed-line broadband-access businesses.
During the last couple of years, both Nokia and Siemens were
trying every means to restructure NSN. In April 2011, NSN bought
the 3G/4G CDMA network gear businesses of
Motorola Solutions Inc.
), which gave it a solid foothold in North America. NSN has also
been systematically selling its non-core operations while
concentrating on the wireless and fiber-based segments.
Meanwhile Nokia and Siemens have had several failed attempts
to sell NSN to private equity groups. But the offer prices were
far from attractive. Rather the parent duo decided to invest Euro
500 million each in the venture in August 2011. This went largely
to initiate a bold headcount reduction move, laying off 17,000 or
23% of the total NSN workforce. Management expects its proposed
restructuring to result in an annual cost reduction of
approximately $1.35 billion by 2013.
Hope Alive in the U.S.
The U.S. market once again looks attractive for NSN. Counting
among the positives is the significant growth witnessed in
high-speed 3G and growing deployment of 4G LTE network in the
U.S. These next-generation super-fast wireless technologies have
revolutionized the entire telecom landscape. Telecom carriers are
heavily investing in network upgrade to support massive demand
for mobile data and video. As of now, monetization of data and
video generates huge profit for the carriers rather than a simple
In a volte-face, the low-cost Chinese vendors, Huawei and ZTE,
are now facing political hindrance in the U.S. There are raging
concerns that these companies may act as sources for the Chinese
Government to use U.S. telecom network for spying. Hence, the
absence of Chinese competition and the current depressed state of
) provide an open space for NSN to capitalize on.
Following the acquisition of assets from Motorola, NSN has
started to get contracts from T-Mobile USA and to some extent
Verizon Communications Inc.
). This is another definite good sign.
As attempts to sell NSN to private equity groups failed, both
Nokia and Siemens toyed with the idea of a spin-off of NSN as a
separate, standalone entity in an IPO. Interestingly, the
agreement between Nokia and Siemens for NSN will come to an end
in 2013. However, to conduct a successful IPO, NSN must first set
its business in order with sequential profitability and future
growth projection. Undisputedly, a strong footprint in the U.S.
market will serve that purpose the most. Whether it actually
materializes or not is yet to be seen. At least there are signs
on the horizon that signal such a possibility.
For the long term, we reaffirm our Neutral recommendation for
both Nokia and Siemens. However, Nokia currently has a short-term
Zacks #2 Rank (Buy) and Siemens has a short-term Zacks #3 Rank
(Hold) on their stocks respectively.
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