While the spotlight has been mainly on Nokia’s (NYSE:NOK) smartphone business of late as the company negotiates a tricky turnaround with its Windows Phone-based Lumia series, its oft-ignored telecom joint venture with Siemens seems to be finally turning the corner. Nokia Siemens Networks (NSN), the 50:50 JV between Nokia and Siemens, recently issued positive guidance for the fourth quarter 2012 announcing that its operating margins (non-IFRS) will exceed its previous guidance on the higher end by at least 100 basis points.
This continues the good show NSN has put on in recent quarters with a good number of LTE wins in the Asia-Pacific where Japan and Korea are driving a bulk of the LTE spend currently. What’s more, as the LTE transition continues in full swing, NSN has managed to snag a couple of important 4G deals with T-Mobile and U.S. Cellular in the U.S. as well – a region where NSN’s 4G prospects have been pretty dismal until recently.
NSN will ride the LTE transition
That NSN’s improving financial condition has come on the back of its LTE leadership is also showing in its recent market share gains. As of Q3 2012, NSN had succeeded in increasing its market share to about 20% share of the wireless infrastructure industry, only 2% behind number 2 player, Huawei.  It now expects to reclaim its #2 spot behind Ericsson by the end of 2013.
What is even more reassuring about NSN’s future prospects is that this has come about even as the overall mobile broadband market has shrunk (11% y-o-y in Q3) due to tepid spending in an uncertain macro-economic environment. As carriers choose to allocate an increasing proportion of their tight CapEx budgets on 4G upgrades, the 4G LTE radio access network (RAN) market has almost tripled in size over the past year. This, coupled with NSN’s aggressive re-posturing as a mobile broadband specialist is helping it gain major ground in this transition period.
Restructuring going along well
Apart from revenue share gains, NSN is also benefiting from a major restructuring initiative which was announced in late 2011. As a part of the restructuring, NSN is aiming to cut around 17000 jobs and achieve a total of 1 billion Euros in savings by the end of 2013. Simultaneously, 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 performed really well in 2012, returning to operating profitability in the last two quarters of the year – a big positive sign that the company’s cost-cutting initiatives are taking hold.
Consequently, the division has generated positive cash flows for four straight quarters now, and accounts for more than 35% of our $4.90 price estimate for Nokia’s stock. Our price estimate is about 6% ahead of the current market price.
With 4G LTE deployments ramping up in many parts of the world, NSN should continue to 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 [↩]