Nokia tweaks structure, cuts costs after Q3 operating profit slumps

Nick Wood
By Nick Wood

Oct 26, 2018

via Flickr © cogdogblog (CC BY 2.0)

via Flickr © cogdogblog (CC BY 2.0)

  • Vendor targets €700m of annual savings by 2020
  • Creates new Enterprise Business Group to house 'fast-growth' activities
  • Q3 operating income slumps 27% year-on-year

Nokia is tweaking its structure again and looking to cut further costs, after the company reported a 27% year-on-year slump in third quarter operating profit.

The Finnish kit maker seems to be in a constant state of flux. In March, it restructured its mobile networks division following the departure of its president, Samih Elhage. That restructuring was announced just as the dust was settling on the admittedly well-managed upheaval wrought by Nokia's acquisition of Alcatel-Lucent.

This time round, Nokia is undertaking a modest restructuring so that it is ready to capitalise on 5G, when the time comes. In practice, that means putting chief strategy officer Kathrin Buvac in charge of a new division that groups together the company's emerging, and fast-growing areas of business. To show that it is really serious about it, Buvac will report directly to Nokia CEO Rajeev Suri. Meanwhile, the mobile networks team will concentrate its efforts purely on mobile radio products.

Nokia said the reorganisation will help sharpen its customer focus. Unfortunately for some employees, the company is also sharpening the axe. It wants to reduce annual costs by €700 million by 2020, resulting in an unspecified number of redundancies.

The announcement was made alongside the publication of Nokia's third quarter financial results, which showed that revenue was broadly flat year-on-year, while operating income fell 27% to €487 million.

Time will tell whether Nokia's latest restructuring is about hitting the ground running when the 5G era kicks off so it can outcompete Ericsson and Huawei, or about softening the blow when 5G turns out not to be universal panacea this industry was hoping for.

Full press release below

Nokia announces plans to accelerate strategy execution, sharpen customer focus, and maintain long-term cost leadership

  • Better aligns structure to strategy with improved customer focus

  • Optimizes operating model to maintain competitive advantage

  • Positions company for long-term 5G leadership

  • Targets EUR 700m in non-IFRS annual cost savings by end of 2020

  • Reaffirms commitment to full-year 2020 non-IFRS operating margin and diluted earnings per share guidance for Nokia Group

  • Announces Kathrin Buvac has been nominated as President of Enterprise, commencing January 1, 2019, and remaining on the Nokia Group Leadership Team

Espoo, Finland - Nokia today announces plans to accelerate progress in its strategic growth areas, further sharpen customer focus, and significantly reduce costs.

"Nokia has made considerable progress in executing on its strategy, with excellent momentum in providing high-performance end-to-end networks, targeting new enterprise segments and creating a standalone software business," said Rajeev Suri, President and CEO. "Our early progress in 5G is extremely strong, we continue to increase our investment in this critical technology, and our win rate for new deals suggests that we are in a very good competitive position."

"With the successful Alcatel-Lucent integration and cost-saving program soon to be behind us, we are taking steps to accelerate the execution of our strategy and sharpen our customer focus. We will also redouble our efforts to ensure that Nokia's disciplined operating model remains a source of competitive advantage for us, and that we maintain our position as the industry leader in cost management, productivity and efficiency. We noted earlier this year that we would need to take further cost actions in order to deliver on our 2020 guidance. Today, we are quantifying those actions and raising the certainty that we can meet those commitments," Suri said.

Strategy acceleration

Nokia continues to execute well on its strategy, with a particular focus on high-performance, end-to-end networks, expansion into new enterprise segments, building a standalone software business, and generating significant licensing revenues.

To accelerate this momentum and increase customer focus as the 5G era begins, Nokia plans to realign parts of its organization, including:

  • Creating a new Enterprise Business Group that consolidates a range of existing, fast-growing activities into one focused organization reporting directly to the President and CEO. 

  • Accelerating Nokia's strong momentum in 5G by sharpening the focus of the Mobile Networks Business Group to be on mobile radio products.

  • Strengthening Nokia's capability to deliver industry-leading, fully-integrated and tested Cloud Core solutions by aligning both resources and accountability to the Nokia Software Business Group.

Kathrin Buvac has been nominated as President of Enterprise. She is currently the Chief Strategy Officer for Nokia and has successfully led the company strategy through significant transformations over the last five years. She will remain on the Group Leadership Team.

"These planned changes will strengthen our ability to provide best-in-class mobile radio and Cloud Core solutions to our communication service provider customers," said Suri. "On the enterprise side, our strategy has been to target high-growth, high-margin opportunities with a limited set of companies needing telco-grade networks. Our strong results to-date have validated this approach and we are taking steps to build even further on our progress."

These changes, which are planned to come into effect on January 1, 2019, are subject to consultation with employee representatives where appropriate.

Restructuring program

Nokia is targeting to reduce of its non-IFRS annualized operating expenses and production overheads by EUR 700m by the end of 2020 compared to the end of 2018, of which EUR 500m is expected from operating expenses. Nokia plans for these savings to come from a wide range of areas, including investments in digitalization to drive more automation and productivity; further process and tool simplification; significant reductions in central support functions to reach best-in-class cost levels; prioritization of R&D programs to best create long-term value; a sharp reduction of R&D in legacy products; driving efficiency from further application of our best-in-class common software foundation and innovative software development techniques; the consolidation of selected cross-company activities; and further reductions in real estate and other overhead costs.

These planned changes are expected to result in a net reduction of employees globally. Such reductions will be subject to local consultation requirements with employee representatives, once detailed plans are developed. It is expected that the one-time costs of implementing these planned changes is EUR 900m, with an impact on cash flow of approximately EUR 900m.

"Our industry is one where a constant focus on costs is essential," said Suri. "The plan we are announcing today is the logical step to take as the completion of our Alcatel-Lucent-related cost saving program draws near. Since the acquisition closed, we have been integrating and capturing synergies and now it is time to focus on optimizing and ensuring that we are lean in every part of our business.

Even if these actions are right for our business, we do not take them lightly given the expected impact on our employees. We will strive to do right for those people affected by the planned changes, acting transparently and providing transition and support to those who need it."

2020 guidance

Nokia reiterates the guidance issued earlier today in its third-quarter earnings report for Nokia Group non-IFRS operating margin of 12-16% and diluted earnings per share guidance of EUR 0.37 - 0.42 in full year 2020.

Additional financial information related to Nokia Software and Enterprise is planned to be provided starting with Q1 2019 results.

Nokia's analyst conference call will begin on October 25, 2018 at 3 p.m. Finnish time. A link to the webcast of the conference call will be available at Media representatives can listen in via the link on that website, or alternatively call +1 412 317 5210.

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