Nokia-Siemens Should Tap Growing LTE Market to Stem Revenue Losses
A recent report says that Sanford Bernstein’s equipment analyst Pierre Ferragu believes Nokia-Siemens’ (NYSE:NOK) significant exposure to the European market is the prime reason behind the joint-venture’s relatively good position as compared to its competitor Alcatel-Lucent (NYSE:ALU). [1] According to Bernstein, Europe contributes about 32% of the JV’s sales and “is their more profitable and cash generative business.” However, the analyst did not sound positive about the company’s future, terming it ‘dreadful’. Apart from Alcatel-Lucent, the 50:50 joint venture between Nokia and Siemens (NYSE:SI) also competes with Ericsson, Cisco (NASDAQ:CSCO) and Juniper (NYSE:JNPR).
Our $7 price estimate for Nokia stock is now about 15% ahead of market price.
See our complete analysis for Nokia stock here
Nokia-Siemens’ wireless division, its primary focus
Both Nokia-Siemens and Ericsson (NASDAQ:ERIC) focus mostly on wireless equipment rather than wireline which helped both the companies post double digit sales growth in Western Europe. In our Trefis model, we can see that Nokia-Seimens’ wireless division brings over $5 billion in revenues, which constitutes more than 80% of its combined wireless and wireline revenues. On the other hand, Alcatel Lucent, which has a decent landline exposure, suffered a decline in sales in the region as operators shifted their spending from landline to wireless. [1]
The joint-venture’s focus on wireless should have helped the company post overall growth in sales; however, that is not the case as the company’s overall sales have declined an average 2% every quarter while competitor Ericsson’s have shown an average increase of 24% per quarter y-o-y. Bernstein gives his reasoning:
Not only do they lose scale to Ericsson and Huawei but they also lose profits and consume cash on what they defend, as the only way they can defend themselves is modernising their own footprint! The recent cash injection by both parents may mean people in charge see the problem coming through as well. [1]
LTE market presents huge opportunity
We believe that the prime reason for the overall decline in sales has been a less than good penetration in the LTE market, where Alcatel-Lucent and Ericsson have benefited the most from the ramping up of LTE networks by Verizon (NYSE:VZ) and AT&T (NYSE:T). Both Alcatel-Lucent and Ericsson provide wireless gear used by AT&T and Verizon in their LTE networks. According to a report by the Dell ‘Oro group, Ericsson captured 44% of the wireless LTE market while Alcatel Lucent’s share rose to 30%, ahead of both Huawei and Nokia-Seimens. [2]
Dell ‘Oro estimates that LTE contributes over 50% of the overall mobile radio access networks market and hence is a big driver for the company’s revenues going forward. As more and more carriers upgrade their networks to 4G LTE in the U.S., Nokia-Siemens will be hoping to capture a bigger chunk of this market. Just as 3G technology made its way into emerging markets eventually, operators in emerging markets will also be looking to modernize their networks, an opportunity that the company can use to increase its penetration in the LTE market.
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Notes:- Nokia-Siemens Outlook ‘Dreadful’, Says Bernstein, Barron’s, November 11th, 2011 [↩] [↩] [↩]
- Ericsson, Alcatel dominate LTE market, Reuters, November 16th, 2011 [↩]