Press reports have linked Swedish vendor Ericsson with Nokia Siemens Networks' (NSN) Business Support Services (BSS) division. The sale of its BSS division is part of the reorientation of NSN's strategic focus towards mobile broadband, customer experience management and services. BMI considers NSN's reorientation positively; however, asset divestment should only be considered a first step as the vendor faces significant challenges in the short-to-medium term.
It had previously been reported that Ericsson was among a group of interested parties including Amdocs and French IT services firm Atos. However, it has since been reported, citing persons familiar with the matter, that Ericsson is in pole position to acquire the BSS division - which could be worth up to US$377mn. The division provides telecoms operators with services including converged charging and billing, mediation and service brokering. Ericsson's interest comes as the vendor looks to expand in the area of BSS/OSS following its January 2012 acquisition of Telcordia Technologies for US$1.15bn.
|Revenue Mix Still Needs Work|
|NSN Revenues By Geography (EURmn) And Y-o-Y Change (%)|
Given NSN's recent poor financial performance, it reported a EUR227mn operating loss in Q212, and the positive view BMI holds about growth prospects for mobile broadband services in the medium term, we view the sale positively in the wider context of realigning to target growth segments. However, we caution that the divestment of the BSS division - following the sale of the microwave transport business to DragonWave, its WiMAX division to NewNet Communication Technologies and its fixed broadband access business to Adtran earlier in 2012 - will not prove a magic bullet for NSN's problems.
A significant concern for NSN continues to be its cost base, and the potential impact on the business of streamlining through employment disputes and reduced flexibility to meet demand. The vendor is currently undergoing a major restructuring, of which non-core asset divestment is a part and which includes plans to cut 17,000 jobs by YE13, with cost savings estimated to be as high as US$1.3bn. It is not alone in pursuing aggressive restructuring, with rival vendor Alcatel-Lucent also undertaking a significant restructuring programme that includes cutting its workforce. BMI believes both vendors' difficulties are a symptom of macroeconomic headwinds and stiff competition from Chinese vendors Huawei and ZTE.
Meanwhile, BMI believes NSN's geographic revenue mix also continues to be of concern. NSN's revenue performance y-o-y to Q212 shows declining revenues in all regions except Asia Pacific, but the impact of divestment is key to this trend. Of greater concern is the reliance on the European market, which could remain subdued over the short-to-medium term, however, in this, there is reason for optimism. The shift to mobile broadband as a strategic focus should help shift revenues towards emerging markets over the medium term. BMI expects rapid growth and high investment in mobile broadband in emerging markets where fixed broadband does not have a consumer legacy and would prove relatively expensive to deploy.
Increased exposure to higher growth emerging markets should benefit NSN in the medium term; however, it will continue to face low-cost competition from Huawei and ZTE. Therefore, BMI believes that it is the combination of efficiency gains with strategic reorientation that can underpin a turnaround in performance - placing a significant onus on management's ability to execute its strategy.