Editor’s note: Now that Nokia has combined with Alcatel-Lucent, Technology Business research analyst Patrick Filkins reviews the last quarterly results for Nokia as a standalone venture and what the future holds for the recently merged communications giant.
Note: Be sure to read the Nokia side of the story as part of this two-part analysis of the combined Nokia Alcatel-Lucent venture.
HAMPTON, N.H. – In its last stand-alone quarter, Nokia maintained high margins despite lower revenue from developed markets in 4Q15
Nokia’s results indicate the company is weathering a shift to higher sales volume in developing regions, such as China and the Middle East, where margins are typically lower, by pursuing high-margin professional services engagements and paring expenses. Nokia’s margins will be challenged further by the integration of Alcatel-Lucent in 2016. Alcatel-Lucent’s revenue contains a higher proportion of hardware, putting it at a disadvantage long term as hardware commoditization threatens to erode margins.
Nokia will grapple with a weaker outlook in the wireless market, particularly in China, where LTE coverage deployments are winding down. Nokia will partially offset the declines in China by pursuing contracts in India, where 3G and LTE deployments are accelerating.
Following its acquisition of Alcatel-Lucent, Nokia will streamline operations to meet its cost-reduction goals
Signaling the end of a nine-month process, on Jan. 14, 2016, Nokia and Alcatel-Lucent began operating as a single entity to create a leading vendor in the mobile, IP and fixed access markets. Now, Nokia will execute its integration and rebranding plan.
Prior to closing, the company announced its executive team and operating structure including the appointment of three Alcatel-Lucent executives to lead its Applications and Analytics, IP/Optical Networks and Fixed Networks divisions. Alcatel-Lucent Submarine Networks (ASN) will operate independently while other units, such as Nuage Networks, will operate autonomously.
To meet its cost reduction goals of €900 million (or $988 million) by 2018, Nokia will pare and integrate overlapping areas such as radio access, services and R&D. Resolving the overlaps will take time, which rivals could use to poach customers amid uncertainty.
However, TBR expects Nokia’s recent history of swiftly executing acquisition integration to mitigate customer concern and enable it to maintain revenue growth and profitability momentum.
Nokia leads its peers in service delivery evolution, but absorbing Alcatel-Lucent could hinder momentum
Nokia’s Global Services business is prepared to transition with its customers to a software-defined, information and communications technology (ICT)-centric world. Nokia is making its service delivery organization more efficient by leveraging labor automation and cognitive analytics, setting the stage for a sustained competitive advantage over peers, particularly Ericsson and Huawei.
To secure an advantage, Nokia will have to demonstrate that it can continue to evolve while simultaneously integrating Alcatel-Lucent’s business, which could distract it from its services evolutionary path. Nokia needs to focus on becoming more services-led and relying less on its product sales to drive services revenue, an issue that is exacerbated by the addition of Alcatel-Lucent. Nokia’s competitors are branching out into growth areas such as OSS/BSS, media and enterprise networking, domains Nokia is not pursuing aggressively.
These areas hold a lot of promise, not only from a revenue growth perspective but also from a business diversification perspective. Nokia’s decision to scale back and focus on niche services areas will help the vendor take share, but it will also constrict its addressable market, limiting its long-term revenue growth potential.
(C) TBR
