Nokia Siemens Networks recently announced its financial results for its first full quarter as a combined entity, after the respective Finnish and German partners agreed to merge some 16 months back.
The European company endured a challenging period in 2Q07. Both net sales and margins were weak with the company conceding that the results signalled the need for decisive action.
Overall, Nokia Siemens Networks' sales revenues for the quarter were US$4, 767 million, with the Middle East and Africa figuring as fertile ground with the company drawing $512 million of sales revenues in the region.
Nokia Siemens Networks' second quarter operating profit was negative $1.8 billion, with an operating margin of -36.8%. The company's second quarter operating profit included a charge of $1.3 billion related to Nokia Siemens Networks' restructuring costs and other one-off charges.
The operating profit for the second quarter 2007, excluding one-off charges, was negative $500 million, with an operating margin of -10.5%.
Operating profit in the second quarter 2007 also included $412 million of other acquisition related costs for intangible asset amortisation of $159 million and inventory value adjustments $252 million.
Nokia Siemens Networks officials were also at pains to point out that the inventory value adjustments only impacted the company in 2Q07.
Company officials also report that restructuring charges and other special items are expected to be significantly less during 3Q07 and 4Q07 than those incurred in the previous quarter.
As a result of these figures, the company announced that it no longer targeted a double-digit operating margin (excluding special items) by the end of the new company's first year of operations.
Net sales for the quarter were also impacted by a number of challenges related to the launch of their operations, including delayed purchases by customers to a greater extent than expected.
The company cited increased management focus on integration, and implementation of its previously announced compliance programme, as requiring a significant amount of management attention.
"It's very difficult to judge how your customers are going to react whenever you enter into a merger on this scale," concedes Nokia Siemens Networks CEO Simon Beresford-Wylie.
He also admits that a certain degree of confusion regarding Nokia Siemens' product portfolio in the marketplace had led to a delay in purchase orders from some of its customers, offering a window of opportunity for rival companies to gain ground.
Restructuring programmes at both Nokia Siemens Networks and Alcatel-Lucent have also led analysts to predict that rivals such as Ericsson might steal a march on the newly merged outfit.
"The speed with which market dynamics have evolved has definitely been a lot quicker than we had previously anticipated and I believe that's evident in our 2Q07 results which did lead to a certain level of disappointment," says Beresford-Wylie.
He concedes that price competition has been "fierce" in the global telco industry, with the emergence of low-cost vendors, such as China's ZTE and Huawei, placing increased commercial pressure on the company.
Accordingly, Nokia Siemens Networks is in the process of accelerating the new company's annual cost synergies target, with Beresford-Wylie noting that the previous target of achieving $2.1 billion worth of synergy savings by 2010 would now be brought forward to the end of 2008.
Additionally, the company is looking to achieve further savings of $690 million, a task that will not be achieved without significant effort, adds Beresford-Wylie.
"We need to do this to get our cost base into a good competitive shape. One of the stated necessities is to downsize our workforce by about 9, 000. It's never pleasant to have to make those decisions," he says.
By the end of 2010, the company expects an adjustment in Finland in the range of 1,500-1,700 employees, including the 700 in the initial consultation process, from an initial base of approximately 10,000.
In Germany, Nokia Siemens Networks has already agreed on the adjustment of between 2,800-2,900 employees over the next two years from an initial base of approximately 13,000.
He also notes how the process of implementing these cutbacks has only started in the last five months and that further reductions in employee numbers will be spread across the company's operations in order to reduce areas of overlap.
"We are merging approximately 60, 000 people from two companies and it takes a lot of effort to assimilate the respective cultures and there are quite a number of interesting dynamics and overall I'd say that we are managing pretty well," reports Beresford-Wylie.
"The integration is a massive undertaking and we still have a lot of work to do," he adds. "We are restructuring in a market that is enduring a period of considerable change."
The Middle East and Africa presents itself as a major priority in the company's global aspirations, Beresford-Wylie says.
"Operating in high growth markets brings with it different challenges in terms of operating margins but we foresee huge potential in the Middle East and Africa," he says.
"It has obviously been there for a while but it's the speed of this growing demand that has been so dramatic."
The UK native also reports that the company has invested massive amounts of energy into reorganising its operations. "Over the last six months much of our time has been consumed by sorting out the end-to-end processes within the organisation and how we deliver products to our customers," he says.
Beresford-Wylie's recent visit to Dubai formed an integral part of his global tour of the company's regional headquarters located worldwide. Despite the testing times detailed in Nokia Siemens Networks' 2Q07 results call, Beresford-Wylie claims that the last six months have not been all doom and gloom for the company.
"The feedback I have received from our Middle East and Africa division has been pretty positive so far. Our customer loyalty index is the highest it's ever been in my time with the company. In fact, I would even suggest that we are still enjoying something of a honeymoon period. I think we should get a clearer idea of how things are in the forthcoming quarter," he reports.
Nokia Siemens Networks employs 3000 service personnel in the Middle East and Africa, which Beresford-Wylie says helps the company deliver premium quality service standards.
"One of the things I try to highlight is our evolution towards a more service-orientated entity and one that can help network operators achieve synergies, such as OPEX, as well as drive revenues," he says.
Services the company currently offers include end-to-end auditing of processes, benchmarking efficiencies and providing software tools that change the way networks are managed.
"We are starting to promote our ability to help network operators design service delivery platforms and frameworks that can aid in the delivery of premium content and with it advertising revenues," explains Beresford-Wylie.
He also points to the fact that the company's head of services has been appointed to its executive board as an indication of how significant a role the managed services unit will play in the company's long-term fortunes.
The Nokia Siemens Networks CEO also notes that the location of the business unit as an indication of the company's global intentions. "The new business unit will be located in India and that's the first business unit to be headquartered outside of Finland or Germany," he says.
"Given the shift in dynamics towards more developing markets, we are keen to focus on areas such as the Middle East and Africa territories."
By 2015, Nokia Siemens Networks expects five billion people to be connected to telco networks, and that the vast majority of new subscribers will come from new growth markets in Asia and Africa.
"The vast bulk of the next two billion people to be connected will be derived from the world's emerging markets such as the Middle East and Africa, Asia-Pacific and Latin America," predicts Beresford-Wylie.
He also cites figures stating that the number of telco connections in the Middle East and Africa will double to 600 million within the next three years, a rate of growth he describes as "phenomenal".
He also claims that in an area of some 1.3 billion inhabitants, one billion of the Middle East and Africa's populace has yet to make a phonecall, making it the least penetrated region in the world.
The company has further marked its presence in the Middle East and Africa region by teaming with eminent operators such as MTC/Zain as part of Nokia Siemens Networks' ‘Next Generation Partnership' scheme.
"When you are operating in a region that is growing so quickly, what is essential is that you have a big enough team with the necessary skills-mix to execute the swift roll out of a network," reports Beresford-Wylie.
The two companies recently signed an agreement on the deployment of Nokia Siemens Network's Charge@Once Select solution, with the deal to be implemented by 4Q07.
Additionally, Nokia Siemens Networks has been selected to modernise MTC/Zain's core network in Kuwait with its mobile soft switching technology for 2G and 3G subscribers by 2Q08.
Beresford-Wylie contends that regional demand for broadband services will buoy the company's fortunes, adding that its bevy of next-generation passive optical networks (PON), positions the company favourably in the Middle East, especially given the region's infrastructure construction boom.
"The best way to provide broadband connectivity to customers at super fast speeds is through deploying fibre-optic cable, either to the home or the curb, and we are deploying a number of next-generation PONs across the Gulf," he states.
With the increased demand for fibre-optic services, managed network services and inevitable changes in the region's regulatory climate, Beresford-Wylie remains confident in the company's ability to negotiate the travails of the merger and that the Middle East and Africa will prove a solid base for growth.
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