• Key EMs should stabilise: We also believe that weakness in several key EMs is now reflected in Nokia’s revenue run rate. In many of these regions falling oil prices and FX have negatively impacted capex spending patterns of the carriers as equipment is typically sold in US$. Given bottoming macro fundamentals and FX as per BofAML’s economists’ views, we expect demand in these regions to begin to stabilise from here. We highlight the following markets with sub-seasonal 1Q revenues: China (11% of total – down 38% qoq in 1Q16); Latin America (7% of total – down 43% qoq); Middle East & Africa (8% of revenues, down 34% qoq).  

• YoY trough in 1H: On a yoy basis easing Networks revenue comps and stabilising revenues should drive a narrowing in Yoy revenue decline as we go through 2016. 

Cost story not broken

We had previously analysed that we view Nokia’s synergy target as conservative, and management has now raised deal synergies to an unspecified upside vs its original E900m guidance.  

Clearly the revenue environment, particularly in wireless, is more challenging than thought at the announcement of the acquisition, so that we expect management to further increase the intensity of its drive to take out costs.   

Strong execution track record on cost savings

In our previous work we had highlighted that part of our confidence in higher synergy potential stems from Nokia’s current CEO Rajeev Suri’s strong track record on cost savings realized from the turnaround of Nokia Networks. We recall that….

• In November 2011 Nokia’s NSN JV, led by now-Nokia CEO Rajeev Suri, announced a restructuring that targeted cost savings of ~EUR1bn and cut headcount by 25%. This target was equivalent to 7% of 2011 revenues and cost base. The cost savings target was subsequently raised to >EUR1bn. We estimate €1.8bn in savings were eventually delivered, equivalent to 13% of the pre-restructuring cost base adjusted for disposals/revenue loss and mix improvement. This compares to ~4% of the combined ALU/Nokia cost base implied by management’s €900m target.

• Eventually NSN’s adj operating margins improved from <2% in 2011 to ~12% in 2014 and stayed in a 10-12% range since. It took less than 12 months for the restructuring to start showing a noticeable improvement in margins. 

• During the turnaround the team also integrated the Motorola and Panasonic networks businesses that NSN acquired in early 2012 and in 2014.   

E1.6bn in savings doable

While management has not detailed the upside potential to its E900m target (yet), we estimate that it could potentially extract as much as E1.6bn by 2019E. We have summarised this below.  

Table 2:

We estimate E1.6bn on cost savings are achievable  

Area of cost savings     Amount (EUR m)      BofAML comment

Alcatel wireless R&D          660                                 Assume 60% reduction by 2019; mostly from removing overlapping product development, particularly on 5G

Other Networks R&D          258                                 Assume reduction of 5% of cost base from integration of IT, back-end, site rationalisation etc

Networks & central SG&A   231                                 Assume reduction of 5% of cost base from integration of IT, back-end, site rationalisation etc 

Networks COGS                    461                                 Assume reduction of 3% from higher volumes/scale savings in components , supply chain & manufacturing; rationalisation of  sites and shared services/3rd party contractors

Total cost savings             1,610                               Source: BofA Merrill Lynch Global Research estimates