Exactly a year into his job, the global CEO of troubled telecom gearmaker Nokia Siemens Networks, says the company's turnaround is well on track and added that the company will post operating profits at the end of this fiscal. Rajeev Suri, the first Indian to head a global telecom gearmaker, was entrusted with task of cutting costs, reducing employee numbers, increasing sales and enhancing focus in five key target markets after NSN declared massive losses last year. Under his leadership , NSN recently bought out Motorola's networks business for about $1.2 billion giving it increased access to American, Chinese, Japanese and Russian markets. NSN had recently reclaimed the No. 2 spot in the telecom gear space, which it lost to China's Huawei last year. Mr Suri revealed that the company had received offers from private equity players for a stake sale. He did not rule out the possibility of NSN, jointly owned by Nokia and Siemens, divesting stake in the immediate future. Excerpts:
Q. It has been a year since you took over the top role at NSN. Give us an update on the progress of the turnaround. After taking charge, you had said that NSN aims to grow faster than the market in 2010 and was aiming for a operating margin profit of 0-2 % or a breakeven. Will you be completely out of the woods by the year-end ?
I am happy about the year gone by because our plan for turnaround is clearly starting to show results. We have very good deal momentum . Our customer loyalty and engagement has improved–our road map has strengthened. The quality of our products has improved. Our services strength continues to be in ascendancy mode. We are very a different NSN than that we were a year ago. In Q4 of 2009, our profitability was at about 5.7%. In Q1, 2010, we were just short of 1% operating profit and in Q2, this year, the operating profits were at 1.8%, just short of the 2% target we had set. We are on track for that 2% profitability for the year-end with two quarters still to come. On growing faster than the market, it is very difficult to compare because we are the first to report. Our guidance is that the market will remain flat in 2010 but we have to wait for the year-end to see if this was the right call. The market has been down by almost 4% or more during the first half of 2010, but we will have to see the second half. Our top line decline last year, which was as high as 21.4% y-o-y , has been arrested quite significantly and we were down 5% in Q2 of 2010. And during the second quarter, we could not sell equipment in India because of security issues. Otherwise, Q2 for NSN would have been a growth quarter. Our decline has been at a much lower pace during this period compared to other vendors. We are generating cash flow from operations in the last few quarters and our deal momentum now is the strongest in two years.
There are enough external evidence to prove that we were the only vendor that took market share in mobile broadband space. NSN has the highest number of 4G or LTE deals–we have 17 contracts while our closest competitor has less than 7. NSN has the fastest-growing managed services segment in the industry, and we have a total of about 180 3G customers which will increase with the launch of 3G services in India.
Our breakeven in the beginning used to be € 3.5 billion/quarter–we needed so much in revenues every quarter just to break even. Now it has come down to € 3 billion/quarter. This means our costs have come down and our margins have gone up. In the first half of 2009, our gross margin was 26.9% and in the first half of this year, it was 30.9%—a 4% jump. We made a decision to buy Motorola after considering all these points. We are also looking at new business avenues such as subscriber data management. We are providing identity management solutions, billing solutions and are exploiting our strength in energy solutions.
All these signs of the turnaround–leadership in mobile broadband, moving into business transformation, the strong deal momentum combined with the recent Motorola deal, have resulted in expressions of interest from private equity players. We welcome the interest from PE firms as we see it as a sign of our progress. If any funding comes in from PE players, it will be used within NSN and will be complementary to our shareholders. But, it is not necessary for us and we don't require immediate funding. A deal does not need to happen necessarily and let me emphasise that even if it does, Nokia and Siemens will continue to have a majority stake.
Q. Last year, NSN had identified four priority and breakthrough markets –India , North America, Japan and China–and said that its executive board will rotate its meetings between these four places. What has been the progress, especially in North America, where Ericsson has been so successful?
This is precisely why we bought Motorola. We have been consistent with our priority markets . With Motorola, we have moved from being the No. 6 wireless vendor in the US to No. 3. We are not including the $7-billion deal which we won recently in the US over a seven-year period with LightSquared, a venture backed by Harbinger Capital Partners. This is one of the largest deals ever in the industry. Now, it remains to be seen if we will be better than No. 3.
The Motorola acquisition has also enabled us to become the No. 1 foreign vendor in Japan and has given us an increased market share with China Mobile in China. We now have six priority markets as we have expanded the list to include Brazil and Russia. In Brazil, we have become the No. 1 player and we won some recent deals in Russia. We have just announced the opening of a global network solutions centre in Russia just like the one we have in Delhi. Also, we have become No. 1 in the top markets in Western Europe while we are gaining in the others.
Q. How important is India to NSN?
We have 65,000 employees globally, of which about 12,000 are in India. It is one of the 6 priority markets. In the last quarter, revenues from India were down to € 139 million compared with € 257 million in China. But India sales were down due to a ban on equipment import on account of security issues, which has now been resolved. When business becomes normal, it will be one of our top markets. We now consider India as a region along with APAC and China. It is important not just from a revenue point of view but also as an industrial platform. Manufacturing & R&D are both carried out here. Also, our services hub is in India and therefore it is far more than just a market. We have more than 3,500 trained 3G engineers in India even before services on this platform has been launched. We have announced two 3G deals in India. Others are in the pipeline and have not been announced yet. We are on target for our 3G market share in India. Our services hub here in Chennai and Noida is growing very well and we are the only company to have a global delivery model out of India. Services grew 7% in service in the last quarter and managed services alone grew 27% during this period.
Q. There is a vibrant debate in the country on the two technology standards–the upcoming LTE and the existing WiMAX. While globally, majority of mobile operators say they plan to offer 4G (fourth generation) mobile data using LTE instead of WiMAX, none of the players in India have committed to any standard. As India, China and Asia adopts these new technologies, what sort of innovation will come from these countries?
It is about the ecosystem. It will be either be TD-LTE or WiMAX in many countries, including India. Some operators here may want to start with WiMAX because the ecosystem—devices , dongles—already exists . Then they may move to LTE when this ecosystem develops. Other operators may move straight to TD-LTE . We are okay with both approaches. We will support migration from WiMAX to LTE or directly to LTE from 3G. This is where the acquisition of Motorola helps us as they are the leaders in WiMAX. We will create opportunities for our customers to migrate from any platform—be it 3G, GSM or WiMAX—to LTE. We are in discussions with some of our customers in India on the right strategy they need to adopt with respect to these technology platforms. LTE will get a global ecosystem in the future because Japan, North America , China, India and Middle East all will go on this platform soon. But we will tell our customers that they can transition successfully from WiMAX to TD-LTE . With Motorola, we are the only ones that has scales on both these technology platforms – WiMAX and LTE. The base stations we are now setting up in India are LTE ready and can be shifted from 3G to LTE within 30 minutes without making a site visit. On the services side, on the application front or even the best way to combine LTE and WiMAX–these innovations will all be led by India and China. Spectrum is limited in countries such as India giving us the opportunity for innovation, and for NSN, it gives us a platform to showcase smarter networks and optimisation skills.
Q. But analysts maintain that despite deal momentum, you have not been able to dislodge the likes of Ericsson from winning the larger deals. You are making inroads into new players and geographies, but do deal numbers translate into proportional revenues?
We have more than 180 3G customers -— the next player has about 140. Again, 18 out of the 25 largest 3G players are served by us. When you look at LTE, we have won a series of big deals in this space recently across Europe, Australia , North and Latin America. We have now regained the No. 2 position in the telecom equipment space and this happened even before we bought Motorola. This would not have happened with a bunch of smaller deals and customers.
Q. Despite regaining the Number 2 position from Huawei, are you still vulnerable to competition from the Chinese? Has the telecom vendor market reached a scenario where further price erosion will not happen?
Our view is that we have to offset the price erosion with significant cost reductions. This is one of the reasons why our gross margins have improved. We have shifted a bulk of our personnel to low-cost countries—both in R&D and otherwise. We have now 61% of our entire personnel and our 55% of R&D employees in low-cost countries. Our R&D has actually improved despite lower costs and productivity is up by about 35%.
These are some of the steps we have taken to counter competition. On the price erosion point, it is more stable now. Only one part of our business—network systems—is very price sensitive and subject to intense competition. The services business is very much based on trust and we don't compete on price. We have 300 managed services deals. The third part—business solutions—is all about customer experience and how we can improve the operators' customer experience by offering better solutions.
Here you are often winning deals even before there is an RFP on the table. Only one part of our business is prone to competition from Chinese. The cost reduction of € 500 million is on track. The reorganisation of our businesses into three units, as against five earlier, has enabled us to become nimbler, made us more efficient, and resulted in us offering better solutions to our customers. It has also led to faster decision making within the company which has had an impact on deal momentum.