On May 22, Bloomberg News reported a story saying that Nokia Siemens Networks, a joint venture between Nokia (NYSE:NOK) and Siemens (SI) was in the process of another round of restructuring in order to work more efficiently and develop better relationships with the customers. According to the story, Nokia will be laying off some managers, closing down some functions and simplifying its structure overall.
The changes will particularly take place in Latin America and Europe where Nokia Siemens Networks faces stiff competition from Ericsson in addition to Chinese companies that are offering similar services for much cheaper prices.
Rene Svendsen-Tune, head of Nokia Siemens's customer operations in Europe and Latin America, sent a memo to employees saying that the new plan would be implemented starting July 1 and this plan would allow Nokia Siemens Networks to become more agile, simpler and have improved relationships with customers. Furthermore, the company will be cutting more jobs in order to save more money. Due to the cost cutting measures implemented between 2011 and now, the company is able to save $1.3 billion annually on its operating expenses, but more cuts are needed to ensure sustainable profitability in the future.
A few months ago, the partnership between Nokia and Siemens has expired, which means that either of the two companies will have the freedom to do whatever they want with their part of the company. Because Nokia runs the company and makes most of the decisions around it, many people (including me) expect Nokia to keep its part of the company while Siemens sells its shares to either Nokia or a third party.
The latest development reinforces the idea that Nokia wants to keep running Nokia Siemens Networks. If Nokia just wanted to get rid of its shares of this company, it wouldn't be making so much effort to turn it around. Last year, Nokia Siemens Networks was the most profitable business unit of the company and the same performance could be obtained this year as well.
For those that don't know, Nokia Siemens Networks provides a large variety of products and services for mobile operators including but not limited to planning, designing, building networks, operating and maintaining the networks, improve customer experience by offering a variety of hardware and software products. The company offers services and products in more than 150 countries to more than 200 service providers. Many of NSN's customers are repeat customers, and this provides recurring revenues for the company.
In 2012, Nokia Siemens Networks generated $17.42 billion in revenues and 30.7% in gross margin. This compares to $17.74 billion in revenues and 27.5% in gross margin in 2011. Despite cutting more than 10,000 jobs and becoming smaller, the company was able to generate as much revenue in 2012 as it did in 2011. The company generated $1.67 billion in positive cash flow for the year, which is much better than $11 million of positive cash flow in 2011.
In 2012, Nokia Siemens Networks had to fight hard under the leadership of Jesper Ovesen to recreate itself. The company exited businesses it considered non-core, eliminated thousands of positions that it didn't see as necessary, terminated some contracts that were not profitable for the company, left some countries that weren't paying off, centralized its pricing process to have more control over pricing, flattened its leadership structure by removing some layers, increased quality by reducing error rate in all aspects and came up with a plan that's clear, executable and practical. In 2013, the restructuring continues and it is expected to reach completion before the year ends. I don't see Nokia leaving NSN after having put so much time, work and resources in this company.
People keep saying that the Chinese competitors who offer cheap services for mobile networks will steal a lot of business opportunities from Nokia Siemens Networks. While I agree that these companies can steal some opportunities from NSN by simply offering cheaper prices, this will not be good enough to attract the high quality opportunities. Many mobile carriers value things like quality, innovation, reliability and expertise over cheapness of a product. In the last 2 years, Nokia Siemens Networks earned a lot of recognition from many different institutions. For example, it won Celtic-Plus Silver Award for LTE core network architecture research, GTI Market Development Award 2013, QuEST Forum '340 Club' award, The European Supply Chain Excellence Award 2012, Innovation Award for Flexi Multiradio in Brazil among many others.
Recently, Orange Communications in Switzerland signed a contract with Nokia Siemens Networks to extend its network and rollout 4G. Johan Andsjö, CEO of Orange acknowledged NSN by saying:
Therefore we are happy to have chosen Nokia Siemens Networks as our partner for the complete delivery of all build activities. With Nokia Siemens Networks we can count on an experienced, long lasting partner, with an existing team of high professionals, providing us and our customers with outstanding network quality.
The head of mobile networks at TIM Brasil, Marco di Costanzo, also acknowledged the quality of Nokia Siemens Networks:
Our long-term partnership with Nokia Siemens Networks has been excellent, and the 2G and 3G equipment installed by the company is performing so well that it was a natural decision to deploy an LTE network with the same vendor. We are confident that Nokia Siemens Networks will build a robust LTE network for us to launch ultra-fast 4G mobile broadband services to satisfy our customers.
Furthermore, Saran Phaloprakarn, vice president of Network Strategic Planning (in Thailand) said:
Implementing a 3G network is very crucial for us. Nokia Siemens Networks has proven its expertise both technically and commercially throughout its partnership with AIS over the last 20 years. We needed a partner who understands our business, and could deploy and manage our network, enabling us to provide the best service to our growing customer base. Nokia Siemens Networks was the clear choice for us to roll out 3G services to the market.
As you can see, many mobile carriers prefer quality over cheap prices and NSN's reputation in the industry is very strong. I don't think Nokia will let go of NSN. In fact, I wouldn't be surprised if Nokia attempts to buy Siemens' share of the company in the coming months. It's interesting how investors currently value Nokia at $13 billion whereas Nokia Siemens Networks alone is worth more than that. This is why I will continue to hold onto my Nokia shares.
Disclosure: I am long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.