Network effects

Nokia could spend a year on hold

Nokia's new bulk is yet to provide rivals with the scare they feared. The Finnish telecoms equipment group's first set of numbers since a Euro 15.6-billion tie-up with France's Alcatel-Lucent saw a nine per cent first-quarter sales drop compared to a year ago. But peers like Ericsson won't be celebrating too much.

Nokia's main headache came in its networks business unit. The division, which accounted for more than half of total group revenue of Euro 5.6 billion in the quarter, sells mobile network services to the 800-plus global carriers. But it is slowing as customers invest less in their networks. Nokia doesn't expect the second quarter to be any better.
 
It could be a temporary blip. Part of the problem for Nokia is that sales in North America, its largest market, fell 17 per cent as customers like AT&T and Verizon held off buying from the new group - ostensibly as they are waiting for its product strategy to become clearer.

But there's a longer term issue. With much of the 4G networks already built in key markets like China and the United States, investment is to slow by seven per cent this year, Deutsche Bank data shows. It's possible that the crunch could extend longer, with 5G not expected to go mainstream until 2020.

The good news for investors is that the Alcatel-Lucent deal still looks justified. The combined group now plans to make "above" Euro 900 million of operating cost savings in 2018. The cuts are already showing in the company's gross profit margin, up 2.5 per cent year on year. They're likely to improve further as the company renegotiates purchasing contracts, trims its real estate footprint and lays off thousands of its workers.

In time, Alcatel-Lucent's presence in areas like Internet Protocol (IP) networking could offset revenue dips elsewhere. This part of Nokia's business saw a small increase in its top line year-on-year. If it can keep growing, the group's period on hold may be limited to a year.