Nokia’s (NYSE:NOK) smartphone business may be floundering amid a painful transition to the Windows Phone platform, but the company seems to be finally staging a comeback in its telecom equipment joint venture with Siemens. Nokia Siemens Networks (NSN), the 50:50 JV between Nokia and Siemens, posted strong market share gains in Q3 2012 on the back of a good number of 4G LTE contract wins.  NSN now has about 20% share of the wireless infrastructure market, only 2% behind number 2 player, Huawei.
While the overall mobile broadband market is shrinking (11% y-o-y) due to tepid spending in an uncertain macro-economic environment, NSN has been helped by carriers choosing to invest an increasing portion of their CapEx dollars in 4G upgrades. As a result, the 4G LTE radio access network (RAN) market has almost tripled in size over the past year, and NSN’s aggressive re-posturing as a mobile broadband specialist is helping it gain major ground in this transition period.
The revenue share gains have also bolstered NSN’s bottom-line and translated into cash flow improvements over the past year. Last quarter marked NSN’s return to operating profitability – a turnaround that we believe will sustain and help offset most of the pain Nokia is sustaining on the mobile devices front. The division has now generated positive cash flows for four straight quarters now, and accounts for more than 28% of our $4.50 price estimate for Nokia’s stock. Our price estimate is about 70% ahead of the current market price.
NSN could be the dark horse
At a time when Nokia’s problems in the handset business are hogging most of the attention, the markets seem to be discounting the turnaround taking place at NSN. NSN’s in-house operational issues, together with the aggressive pricing strategies of Asian rivals such as Huawei, had caused NSN’s market share to fall behind Ericsson and Huawei in the wireless infrastructure market over the past year. However, with the ongoing restructuring, the company seems to be regaining focus on its core wireless competence and is also looking to upstage Huawei by the end of 2013.
The restructuring initiative, which was announced in late 2011, will help NSN cut a total of 17000 jobs and achieve savings of 1 billion Euros by the end of 2013. At the same time, NSN is selling off non-core assets and increasing focus on wireless broadband which has strong long-term growth trends as opposed to the relatively stagnant landline market. As a result of the reshuffle, NSN has done much better this year and even returned to operating profitability last quarter – a big positive sign that the company’s cost-cutting initiatives are taking hold. Underlying operating profitability rose to more than 320 million Euros in Q3 2012 from about 6 million Euros during the same period last year. NSN has now generated cash for the last four quarters and last quarter’s strong 9% operating margins, coupled with the next quarter’s guidance of 8%, shows that the division is well and truly turning around.
With 4G LTE deployments ramping up in many parts of the world, NSN will benefit from the 3G to 4G wireless shift in the coming years. The company has close to 70 LTE contracts globally and is focusing on key regions in North America, Japan and Korea where LTE is being laid out. Of particular interest to NSN in the coming quarters will be TD-LTE, a variant of 4G technology that is being used in many emerging markets such as China and India. NSN is the current TD-LTE market leader with five out of a total of 11 commercially deployed TD-LTE networks using NSN’s gear.  Both China’s and India’s biggest wireless operators, China Mobile and Bharti Airtel, have chosen NSN to deploy their respective LTE networks. With NSN’s future prospects looking brighter than ever before, Nokia will be banking on the division to generate cash and help it tide over the tough Windows Phone transition.Notes:
- Nokia Siemens gains market share in telecom equipment: Dell’Oro, November 13th, 2012 [↩]
- Nokia Siemens Networks sets TD-LTE speed record, goes beyond 4G, NSN Press Release, September 18th, 2012 [↩]