Nokia (NYSE:NOK) is going to focus completely on the networking equipment business, and Nokia Solutions and Networks (NSN) will become the main business segment for the company. However, what are the growth prospects for the company in this segment? What are the challenges? The company will now be operating in a hugely competitive market with slim margins. Nokia may have to develop a niche in the market in order to totally exploit the market. Let's look at the growth prospects and challenges faced by Nokia.
LTE Technology: The Future for NSN?
With the latest smartphone generations arriving in the market, the use of faster internet broadband technology is adopted quickly with 157.7 million LTE connections worldwide. Apple (NASDAQ:AAPL) and Samsung have brought their top tier smartphones with latest LTE (Long Term Evolution) technology. NSN is one of the market leaders in the 4G-LTE market, and the company can benefit from the growing demand for the technology. The penetration rate of LTE technology in the U.S. was 22.16% and growing in 2013. According to 4G Americas, the growth rate of LTE industry will increase by 81% during the next year.
As threats to national and international security have become more frequent and less predictable, NSN's latest LTE based wireless networking products played their part in every industry from railways to public and borders safety. Security companies are acquiring and adopting the latest technology to ensure the security. NSN has provided them with latest LTE products with unmatched performance benchmarks.
With increased consumer demand and decreased service costs, telecommunications companies find it profitable to transfer voice and messaging traffic to Voice over LTE networks which saves more juice on cellphones' battery. According to Global Industry Development Report, companies will invest in VoLTE technology to decrease costs and improve profitability. The Global VoLTE Market Research published a growth rate of 300.4% for this latest and cutting-edge technology.
The competition in the networking business is ruthless, and Nokia has played its turn strategically with good planning. During the last year, the market share of NSN was around 17% -- Companies like Huawei, Ericsson (NASDAQ:ERIC) and Alcatel-Lucent (ALU), are existing market players in the industry. Nokia has planned to move aggressively against these companies to gain more market share. Following this, Nokia has recently joined hands with Sprint (NYSE:S) and China Mobile to implement its LTE network. With the widespread network of Sprint in the U.S., Nokia wants to deploy its ultra-fast LTE technology, with a downlink throughput speed of 1.3 Gbps in the region.
Moreover, Nokia is also exploring other regions and markets to expand its business and profitability. China has appeared to be a land of opportunity for mobile carriers and networking companies in launching the latest TD-LTE technology. Nokia has opened its new sales and operational facility in Libya, ensuring timely delivery of its products and providing satisfactory services to its clientele. The company is strongly considering services too which contributed half of the revenue generated from NSN division in year 2013. The new facility will strengthen Nokia's position in African as well as Middle East and Asian.
Networking Segment and the profitability
The business unit turned profitable after reducing costs and detaching unprofitable businesses. The year 2013 seemed to be pretty good in the first three quarters, but the fourth quarter showed a decline in sales. In the fourth quarter, sales fell by 22% from a year earlier to approximately $4.5 billion, mainly due to the company's failure to complete large-scale Asian projects. The operating margin of NSN fell to 11.2% compared to the same period a year before.
Nokia has not given dividends to its stock holders for the last two years. The company is also planning to give a special dividend in the upcoming period after the Microsoft (NASDAQ:MSFT) deal, which was announced to be settled by mid-2014. The debt holding of the company is finally showing a decreasing trend from last 3 years, which ensures free cash flows for the company to distribute amongst its investors. However, the overall results showed the group is in stronger financial health without the phone business.
Networking business is hugely competitive, and as I said above, the company will have to develop a niche in this segment. Alcatel-Lucent is following a very good strategy of getting rid of less profitable segments and increasing market share of the ultra-high speed broadband equipment segment. Nokia, on the other hand, is focusing on LTE segment, which is one of its strengths. There is a lot of room for Nokia to grow in this segment of the networking industry and I believe the company will exploit the growth opportunity present in this segment.
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Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.