NSN’s services biz grows as hardware takes a powder

Services are starting to overtake infrastructure in Nokia Siemens Networks’ revenue mix as the vendor’s declining sales in the global telecom equipment market are being offset by new contracts to manage networks rather than build them.

Nokia’s first-quarter earnings fell 90%, and the handset vendor’s joint venture with Siemens certainly wasn’t spared in the fallout. NSN revenues last quarter came in at 3 billion euros (US $4 billion), down 12% year-over-year. Meanwhile NSN’s operating losses ballooned 388%, increasing to 361 million last quarter from 74 million euros a year earlier. Chief Financial Officer Rick Simonson attributed the steepening losses to an even greater than normal seasonal decline in network construction resulting from the recession as well as heavy price competition from other vendors.

But the falling off in wireless and fixed infrastructure was offset by increasing revenue from NSN’s growing services business, which encompasses its managed services, consulting, systems integration, network implementation and customer care operations. What was once a business unit that focused primarily on engineering and installation has blossomed into a major—and more constant—revenue stream for NSN. In the last year, services have accounted for about 30% of NSN’s revenues, but in the first quarter the percentage jumped to about 40%--a reflection of declining infrastructure sales but also some sizable new contracts. Last month Orange handed NSN a massive contract to run its 2G and 3G networks in the UK and Spain for the next five years, adding 27.2 million customers to NSN’s managed network roles, as well as run Orange’s 1.2-million-subscriber ADSL fixed-broadband network in Spain.

Nokia CEO Olli-Pekka Kallasvuo said the entire telecom infrastructure industry faces strong macro-economic headwinds, but its services business is acting as a hedge against declining carrier spending. They aren’t just cutting back on capex, but opex, too, which gives NSN the opportunity to sell an outsourcing contract, if not a base station. “Operators are focused on efficiency and business transformation,” Olli-Pekka said. “This provides opportunities in areas such as managed services and systems integration, where NSN has momentum.”

NSN doesn’t break out services revenues by region, but it has had success in landing deals, and not just in Europe. BNSL in India is one of its largest customers, and NSN has even succeeded in the almost-impossible-to-crack North American outsourcing market, landing a 7-year contract with Embarq to run its network operations centers—a relationship that is still in place despite Embarq’s recent acquisition by CenturyTel.

According to NSN, the vendor now has 200 managed services contracts—adding 30 in just the last nine months—serving more than 190 million subscribers globally, which puts it right below Ericsson as the second largest network ‘operator’ in the world. The services unit has also grown to 20,000 employees, one-third of NSN’s entire staff.

The high percentage of revenues from services last quarter, however, may dip back down in future quarters. The first quarter is traditionally a weak quarter for equipment sales, while service revenue from ongoing contracts remains much more constant. This year’s first quarter was much weaker than usual, Simonson said, and NSN expects network spending to pick up throughout the year.

“What we’ll try to do is take advantage of quarter two being a bit stronger in the industry,” Simonson said. “For NSN, we’ll have to see where it comes out in the bottom line. I know we in the management team are focused on making sure we do what’s in our control to make the second quarter behave like it has in the past, which is usually seasonable and sequentially stronger.”

Still, NSN isn’t counting on raking in the sales. The vendor lowered it guidance from its fourth-quarter earnings call, saying it now expected the overall fixed and wireless infrastructure market to fall 10% in 2009 instead of only 5%. “Our latest estimate is based on operator belt-tightening; availability of credit and growing demand for vendor financing; slowed spending among operators in countries facing elections or changes in government; in China, a preference toward local vendors as well as increased price pressure,” Simonson said.

Regionally, NSN saw massive sales declines all over the world. NSN took the biggest hit in Asia, where sales fell 26.7%, though it did see a 5.6% uptick in revenues from China. NSN’s primary market, Europe, fell 9.5%, and in North America sales declined 12% to 169 million euros (US $223 million). NSN has made some recent footholds in North America with CDMA operators. Last October, NSN won a contract to build Telus and Bell Canada’s joint high-speed packet access (HSPA) network. Verizon Wireless tapped NSN, along with Alcatel-Lucent, to develop its 4G IP multimedia subsystem (IMS) architecture, though it was bypassed for the more lucrative long-term evolution radio contract. NSN is also nominally one of the Clearwire’s WiMax equipment suppliers, but Clearwire has yet to announce a single market launch using NSN’s Flexi gear and handed NSN’s initial launch market, Dallas-Fort Worth, to rival Samsung.