Nokia (NOK +2.53%) recently launched a new cloud-native Digital Operations Center, which will allow carriers to split their high-speed internet connections into smaller dedicated "slices".
Carriers often lock in customers with long-term contracts. But with Nokia's new system, carriers can lend out "slices" of their bandwidth for temporary events. Nokia notes a virtual gaming company can borrow a two-hour slice, while a sports stadium might borrow a four-hour slice.
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This automated system can help carriers reach new verticals as they ramp up their 5G networks. Could its rollout offset Nokia's other weaknesses, which caused its stock to lose 40% of its value over the past five years?
Reviewing Nokia's challenges
Nokia has been struggling against its Swedish rival Ericsson (ERIC 0.34%) and its Chinese competitors Huawei and ZTE (ZTCOY +0.00%) in the telecom equipment space in recent years.
Slower-than-expected 5G upgrades and trade tensions between Europe and China, which caused China Mobile (CHL +0.00%) to cut Nokia from its second round of 5G upgrades, exacerbated the pain. The departure of Nokia's longtime CEO Rajeev Suri and layoffs across Finland also shook investor confidence.
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Last year, Nokia generated 78% of its revenue from its Nokia Networks business, 12% came from Nokia Software, another 6% came from Nokia Technologies, and the rest came from other businesses.
Its revenue rose just 1% on a constant currency basis during the year, but its adjusted EPS dipped 4% as a steep decline in its Network operating profits offset the rising operating profits of its higher-margin Software division.
In the first quarter of 2020, Nokia's revenue dipped 3% on a constant currency basis as the COVID-19 crisis exacerbated its previous challenges. However, it squeezed out a slim profit, mainly by cutting costs, compared to a net loss a year ago.
As of last quarter, Nokia expects its share of the 4G/5G mobile radio market, excluding China, to hold steady year-over-year at 27% in 2020. However, it reduced the midpoint of its full-year adjusted EPS growth forecast from 0.25 euros to 0.23 euros, implying 4.5% earnings growth from 2019.
Nokia didn't provide any top-line guidance, but analysts expect its revenue to decline 4% this year. Therefore, most of Nokia's earnings growth could be buoyed by cost-cutting measures like layoffs. Nokia expects high "competitive intensity" in the early ramp up of 5G networks, which will likely limit its pricing power and throttle its gross margins.
Will Nokia's 5G slices attract more carriers?
Nokia is the world's second-largest telecom equipment maker after Huawei, and its new Digital Operations slices could help 5G carriers generate higher revenue by reaching new markets. Squeezing out more revenue from new markets could be a top priority for carriers, since it could offset the hefty expenses of upgrading 5G networks.
The networking slicing market was reportedly worth $200 million in 2019, and could grow at a compound annual growth rate of 15% between 2020 and 2026, according to GM Insights. That market should grow alongside the broader 5G market and strengthen Nokia's Software business.
Unfortunately, Huawei, ZTE, and Ericsson are also launching similar slicing services. Cisco (CSCO +0.76%), the world's top maker of networking routers and switches, also has a growing interest in the market. Moreover, GM Insights notes China -- which Nokia is quickly losing ground in -- is expected to be a top market for network slices, buoyed by strong demand from the healthcare and automotive markets.
Therefore, Nokia's new Digital Operations Center is more of a defensive move instead of an innovative one. It could strengthen its higher-margin Software business and shore up its defenses against its top competitors, but it probably won't offset its other weaknesses.
