Nokia Networks Buys Eden Rock To Boost SON Capabilities

+13.48%
Upside
3.54
Market
4.02
Trefis
NOK: Nokia logo
NOK
Nokia

Nokia (NYSE:NOK) has signed an agreement to acquire Self-Organizing Networks (SON) player Eden Rock Communications for an undisclosed sum. The transaction is expected to close in the third quarter this year. SON is one of the fastest growing segments of the mobile broadband infrastructure market, and it helps to increase operational efficiency in the management of heterogeneous networks. It provides automation to eliminate manual equipment configuration and helps improve network quality and efficiency. [1]

Nokia stated in its press release that Eden Rock’s SON solution, Eden-NET, is “highly complementary” with its own SON capabilities and should help it improve efficiency of its mobile broadband network offerings. SON is likely to help in cutting down network operating costs and enhance customer experience, thus helping improve overall profitability of the company. Nokia launched a new SON solution – iSON Manager- at the Mobile World Congress in March this year. This solution showed great promise in a trial with Korean wireless operator KT prior to its launch, helping reduce KT’s LTE network energy consumption by 40%. The global SON and network optimization software market is estimated to grow to more than $4.5 billion by 2016 and $5.6 billion by 2018 on the back of migration of networks towards 3G and 4G and benefits of reduced operating expenses. [2] ((Press Release, Nokia, March 1 2015)) [3]

Our $7.50 price estimate for Nokia is slightly ahead of the current market price.

Relevant Articles
  1. Is Nokia Stock A Buy At $4?
  2. Nokia Stock Looks Undervalued At $4
  3. Nokia Stock Poised For Recovery After Dismal Week?
  4. Nokia Stock Looks Set For Rally After Rough Month
  5. Can Nokia Stock Continue Weathering The Storm In The Broader Markets?
  6. Can Nokia Stock Continue Its Post-Earnings Outperformance?

See our complete analysis for Nokia stock here

Nokia’s Focus on Profitability

The Networks division’s adjusted operating margin (non-IFRS) declined drastically from 9.3% in Q1 2014 to 3.2% in Q1 2015, primarily on account of lower operating margins in Mobile Broadband. The Mobile Broadband adjusted operating margin declined 8.4 percentage points from 8.2% in Q1 2014 to negative 0.2% in the first quarter this year. This was largely because of higher research and development expenses, higher sales, general and administrative expenses (SG&A) and a lower proportion of high-margin software sales in the overall sales mix. The proportion of software sales was about 5 percentage points lower compared to the prior year quarter on account of lower software sales in North America and Japan.

Taking into account its recent dip in profits, Nokia’s efforts to enhance its footprint in Self-Organizing Networks and optimization software could be more than just an attempt to create new verticals. It is likely that the company integrates the automation and optimization capabilities of SON into all its mobile broadband offerings going forward. This could not only make network roll-out and maintenance projects more profitable for Nokia, but also make its offerings more appealing and competitive in the wireless infrastructure industry. Considering that cost is increasingly becoming a very important factor in bagging new projects, especially in emerging markets such as China and India, SON could help Nokia reduce project costs and bag new contracts. However, this is easier said than done.

Although the SON market is expected to grow at over a 10% CAGR over the next five years compared to almost flat growth expectations in the mobile broadband industry as a whole, the limiting factor for SON is multi-vendor interoperability and implementation difficulties in large scale projects. If Nokia can work around such limitations ahead of rivals such as Ericsson and Huawei, it could immensely improve the acceptability of its products and expand its global market share. Nokia’s share in the global wireless infrastructure market is currently around 18%, according to our estimates.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Press Release, Nokia, May 27 2015 []
  2. Infonetics Report on SON, Oct 27 2014 []
  3. The Self-Organizing Networks (SON) Ecosystem: 2014 – 2020, Market Watch, July 17 2014 []