Nokia faces difficulty of selling unwanted businesses

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Two down, two to go. When Nokia boss Justin Hotard shunted four underperforming units into a new "portfolio businesses" group last November, it was tantamount to putting a for-sale sign outside a crumbling tenement. Inseego was persuaded to buy the unit making fixed wireless access customer premises equipment (FWA CPE) in April. Aurelius, a private equity firm, has followed up this week by acquiring enterprise campus edge (ECE), active in the private networks market. That leaves the site implementation and microwave radio units in limbo almost a year later.

Selling units identified as unwanted and unprofitable was never likely to be easy. Their combined annual revenues came to about €900 million (US$1 billion), according to the update last November, but they also had collective losses of €100 million ($112 million). From Nokia's perspective, the Inseego deal did not look optimal, initially giving the Finnish vendor a 7% stake worth $10 million in the San Diego-headquartered business. After investing another $10 million in Inseego when the deal closed, Nokia was due to hold 11%.

Nokia and Aurelius are keeping hush-hush about the financial terms of their subsequent transaction. That Nokia had identified a buyer seemed probable when it decided to reclassify ECE and stick it next to the FWA CPE unit as part of "discontinued operations" in its second-quarter report. But the figures point to deteriorating performance. Combined first-half revenues fell about a third year-over-year, to €131 million ($147 million). Net losses rose 70%, to €39 million ($44 million).

Aurelius claims in its statement on the deal that ECE generates annual sales of more than €170 million ($190 million). If that means it generates about €85 million ($95 million) in half a year, the implication is that FWA CPE – the only other part of discontinued operations – makes roughly €46 million ($51 million): adding those two figures would produce the €131 million in Nokia's report.

Lumbered

But this also means Nokia is still lumbered with two larger units accounting for nearly €200 million ($224 million) in first-half revenues. The good news is that sales grew 15% year-over-year. What remains of portfolio businesses also recorded a first-half operating profit of €2 million ($2.2 million) – small, yes, but certainly better than the €17 million ($19 million) loss a year before.

Whether this performance can be sustained, however, is questionable. Crumbling tenements typically enjoy a refurbishing for the first time in years when they go up for sale, and Nokia would be wary of neglecting unwanted parts as it tries to attract buyers. But customers also worry about dealing with suppliers that have an uncertain future. They cannot discount the possibility of Nokia's site implementation and/or microwave assets being offloaded to a company that appears far less attractive than Nokia.

This factor cannot be ignored in such a capital-intensive industry. Even Ericsson provoked concern a decade ago when it suffered losses and its ability to meet financial obligations was in doubt. "That has been one thing that has actually been important in order to capture customers, and we came from a spot in 2017 when this was a topic in every customer interaction," said Börje Ekholm, its former CEO, last year. "It hasn't been since then, but every customer I met was focusing on if Ericsson is going to stay alive etc."

In total, Nokia's discontinued operations and portfolio businesses were responsible for only 3.5% of first-half group sales. But offloading them would also have buoyed Nokia's comparable operating profit by roughly 5%. For a company generating annual sales of just €170 million, the ECE part seems to have a large workforce, employing about 1,000 people, according to the Aurelius statement. That would give it revenues per employee of only €170,000 ($190,275), versus about €255,000 ($285,410) for Nokia as a whole.

In pure headcount terms, Nokia could be a lot smaller next year. It finished 2025 with 74,100 employees minus optical business Infinera, which employed about 3,000 people before Nokia acquired it in February. That compares with a year-average headcount of about 92,000 in 2020. But under an earlier restructuring plan, it was due to shed another 4,100 jobs this year, according to Light Reading's calculations. Since then, it has upped guidance for restructuring charges to €800 million ($895 million), from €250 million ($280 million) previously, and confirmed plans for site closures in China. Additional layoffs are happening in Europe, too.

Diet plan

The ambition is to focus a more slimline Nokia on a smaller number of opportunities – optical connectivity for AI data centers and transport infrastructure; full-fiber technology for broadband; core network software in 5G and 6G; radio access network (RAN) products based on the graphics processing units (GPUs) made by Nvidia, now a Nokia investor. But its divestments are taking it away from markets once viewed as significant growth opportunities.

In particular, the inclusion of ECE among the portfolio businesses last year seemed to surprise and even aggravate some observers. Weren't private networks supposed to represent one of the growth markets? Regardless, Nokia had evidently struggled with the development and commercialization of a computing platform called MXIE, according to Pablo Tomasi, a principal analyst for future wireless at Light Reading sister company Omdia. Amid tough competition, Nokia's executives were also apparently worried about head-to-head rivalry in that market with some of Nokia's own customers.

MXIE, of course, is part of the ECE unit being sold to Aurelius. The deal, at least, should give customers "some measure of predictability, although a PE firm will likely want an exit itself at some point," noted Dean Bubley, the founder of Disruptive Analysis, in a LinkedIn post.

Nokia is peeling off and retaining private-network activities that dealt with mission-critical networks and defense. It will also continue to sell RAN equipment for private networks. But the ECE sale could raise some awkward questions about the AI-RAN strategy with Nvidia. It is "not exactly a ringing endorsement of industrial edge compute, GPUs or overhyped 'physical AI' embedded in 5G networks," said Bubley. Nokia's investors, however, may be even more concerned about the status of other portfolio businesses. The clock is ticking.

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