NSN Still Struggling Under Price Pressures

In Nokia’s earnings call today, CEO Olli-Pekka Kallasvuo summed up the first 12 months of Nokia’s networks joint venture with Siemens in one statement: “Overall progress has been difficult but steady,” he said.

While no year-over-year comparison was available since the venture formed in the second quarter, NSN saw a sizable fall-off in sales from the fourth quarter to the first, from 4.6 billion Euros to 3.4 billion Euros (US $5.4 billion), a 26% decline. Much of that drop was attributable to the traditional seasonal declines at the beginning of the year—“Q1 is always a tough one for the industry,” Nokia chief financial officer Rick Simonson said. Part of it was attributable to the falling value of the US dollar, which has affected markets globally. But according to Nokia, NSN is still facing increased pricing competition in the infrastructure market as vendors slash their prices to win new contracts, particularly in developing markets. As a result, its operating margins went negative, to -2.2%, and it recorded an operating loss of 74 million Euros ($118 million).

“Going forward, NSN is fighting continued pressure on gross margins from an aggressive pricing environment in the market,” Simonson said. “However, there are things we can do to counterbalance the effects on margins, particularly continuing to execute on cost synergies. There may be also opportunity to increase the proportion of software sales.”

In all, NSN hopes to create 2 billion Euros ($3.1 billion) in savings from the combination of the two network powerhouses. Its target for achieving those synergies is the end of the year, but until then, restructuring costs continue to weigh on the joint venture. NSN incurred a 100-million Euro restructuring charge in the first quarter, and Simonson said it expects the second quarter’s restructuring costs to be even higher.

In North America, NSN’s sales fell from 243 million to 192 million Euros ($305 million) quarter over quarter, a 21% drop. Currently NSN is engaged in two major wireless projects in the US: building T-Mobile’s high-speed downlink packet access (HSDPA) network and its rollout of WiMAX in Texas for Sprint. The T-Mobile deployment is likely ramping down as the operator readies for its commercial launch this summer, but the Sprint Xohm deployment should be ramping up as it prepares its first test markets for commercial launch.

Those markets—Chicago, Baltimore and Washington, D.C.—were built by Motorola and Samsung, but Sprint has said it will begin the construction of a nationwide network this year, with NSN deploying equipment in cities in the south while Motorola and Samsung build out the Midwest and Eastern seaboard, respectively. Though Sprint hasn’t publically announced any changes to those plans, its recent financial difficulties and the failure of its planned joint venture with Clearwire may have put a deep dent in its initial ambitions. Sprint is seeking funding options for the Xohm network, and numerous media outlets have reported that deal involving any number of investors in the offing. If Sprint doesn’t attract any new financing options, it has hinted it may scale back the scope of the WiMAX network.

Nokia made absolutely no mention of WiMAX on its earnings call, focusing instead on the industry’s newest network fad, Long Term Evolution. NSN is the second-largest manufacturer of GSM/UMTS equipment. Given LTE’s position as the next step on GSM operators’ evolutionary path, it is NSN’s largest potential market in 4G . Still, Nokia officials in North America said that despite the focus on LTE, WiMAX is still a large part of its strategy, and the US Xohm deployments are continuing as scheduled.

Simonson and Kallasvuo, however, emphasized that the global take up of LTE could be the trend that could get the infrastructure industry out of its relative slump. While most network builds are in developing markets today, LTE would shift deployments back to the developed markets, where pricing pressures aren’t as high and vendors have long-established relationships with their operators. Furthermore, the world’s mobile operators appear to be rallying around LTE as a standard, Simonson said, pointing to Verizon Wireless’s decision to adopt LTE and NTT DoCoMo’s commitment to the full LTE standard rather than a proprietary variant.

“A lot of that had to do with Nokia from the device side and Nokia Siemens Networks from the infrastructure side,” Simonson said. The companies “were instrumental in educating and convincing operators that it’s a very efficient, very productive evolutionary path to meet the incredible increase in data needs we’ll see when we get the fourth generation.”