Nokia CEO unveils restructuring plan as sales decline, margins improve

• New CEO revamps structure, top team
• New strategy signals the end of ‘end-to-end’ approach
• Vendor signals fresh job cuts
• Third quarter sales slide but margins improve

Nokia’s new CEO stamped his authority on the company with a new structure and revamped top level management team, plus a warning of job cuts to come, as the vendor reported declining sales and warned of a “challenging” 2021.

Third quarter revenues dipped by 7% year-on-year to €5.3 billion, due mainly to anticipated lower network rollout services sales, but adjusted operating margins (excluding restructuring costs and other one-time items) improved to 9.2% from 8.4%. (See Nokia interim report for Q3 and January-September 2020.)

However, the expected full year adjusted operating margin is now expected to be 9.0%, instead of the previous forecast of 9.5%, while the expectation for 2021 is lower again (a range of 7-10%). A longer-term view for the company’s profitability expectations will be shared next March. 

Presiding over his first set of results, Pekka Lundmark (pictured above), who took over the reins from Rajeev Suri at the start of August, made it clear that the next year will be painful for Nokia and that things need to change:  

“In my first quarter as CEO of Nokia, I have seen both opportunities and challenges. As our solid Q3 results demonstrate, we are making good progress in many parts of our business. Profitability was up on a year-on-year basis, we had the fifth consecutive quarter of solid free cash flow, Nokia Enterprise maintained its double-digit growth, and we continued to strengthen the competitiveness and cost position of our mobile radio products.

When I look ahead, however, the good progress we have made is not enough. Our financial performance in 2021 is expected to be challenging, and more change is needed. We have lost share at one large North American customer, see some margin pressure in that market, and believe we need to further increase R&D investments to ensure leadership in 5G. In fact, we have decided that we will invest whatever it takes to win in 5G. Our customers are counting on us and we will be there for them.”

That “lost share at one large North American customer” refers, of course, to Verizon, where Samsung has swooped in to take a prime 5G position. (See Samsung lands $6.6 billion 5G deal at Verizon.)

And Nokia is still playing catch-up in the 5G RAN market after a faltering start, though it has been recovering of late and landing some major deals as it shifts more towards the delivery of products based on its own Reefshark system-on-chip (SoC), with 37% of its 5G shipments now housing that in-house component.

Naturally, investors weren't overly impressed: Nokia's stock took a hammering, shedding more than 16% of its value in morning trading on the Helsinki exchange, where its share price dropped to €2.89. 

In an effort to better set the company up for future success, Lundmark has revamped the company by introducing a new operating model, which will come into effect on 1 January 2021. (This is the first of three restructuring phases, with further information to be shared on 16 December, the company noted – see Nokia announces first phase of its new strategy.)

The company says the new CEO’s review has reached four conclusions:

1. Technology leadership will be the top priority
2. The current customer base, consisting of telco operators and enterprises (including webscale companies), provides a solid platform for value creation
3. There is a longer-term opportunity to move into higher-value “network-as-a-service” business models [signalling a shift to a software- and cloud-oriented approach]
4. That end-to-end as a core strategic idea will be replaced with a more focused approach, with each of the company’s new business groups having a distinct role in the overall strategy.

The new model comprises four business groups, each with their own fiscal responsibilities, to be supported by a new Customer Experience team that will aim to “strengthen customer relationships across all businesses.” (Nokia currently has three reporting units – Networks, Software and Technologies.)

The four business groups and their leaders, who will be in the new top level management team, are:

• Mobile Networks, with Tommi Uitto remaining as president. This will include mobile network products, network deployment and technical support services, and related network management. It will target leadership in key technologies such as 5G, Open RAN and vRAN. The net sales of Mobile Networks in the past four quarters were approximately €10 billion. 
• IP and Fixed Networks, with Federico Guillén (currently head of customer operations, EMEA and Asia) as president. This will include IP Routing, Optical Networks and Fixed Networks, as well as Alcatel Submarine Networks business, currently reported under “Group Common.” The net sales of IP and Fixed Networks in the past four quarters were approximately €7 billion. 
• Cloud and Network Services, with Raghav Sahgal (currently head of Nokia Enterprise) as president. This will include the existing Nokia Software business (excluding Mobile Networks network management), Nokia’s enterprise solutions, core network solutions including both voice and packet core, and managed and advanced services from its current Global Services unit. This unit will also act as a delivery channel of certain products from other business groups to enterprise customers. Cloud and Network Services will target growth by leveraging the industry transition to cloud-based delivery, network-as-a-service business models, and software-led value creation. The net sales of Cloud and Network Services in the past four quarters were approximately €3 billion. 
• Nokia Technologies, which will remain largely unchanged. The net sales of this business group in the past four quarters were approximately €1.4 billion. Jenni Lukander continues as President of this business group.

There will also be four corporate functions, including finance, legal and compliance, people and Strategy and Technology, which “will include strategic planning, long-term research including Nokia Bell Labs, and IT and digitalization.” The company notes that “the leader for this function will be named at a later stage,” which does not sound too encouraging for Marcus Weldon, current group CTO and head of Bell Labs, though he has survived previous revamps. 

The changes also raise questions about the future of other key individuals within the new structure, including Basil Alwan, current co-president of IP/Optical and Bhaskar Gorti, current president of Nokia Software and the vendor’s Chief Digital Officer. 

And here’s the part of the new plan that will have Nokia staff worried: “Proposed organizational changes referenced in this release may be subject to consultation with employee representatives in certain jurisdictions and are not considered final until such processes are completed.” In 2019, Nokia had just over 98,000 employees globally, down from just over 103,000 the previous year: It seems likely that number will drop again during the coming months. 

- Ray Le Maistre, Editorial Director, TelecomTV