Nokia Shames Ericsson on Profits but Sees Trouble Ahead
Nokia has warned investors of a deteriorating outlook in its main networks market this year just weeks after rival Ericsson lowered its own expectations.
The Finnish vendor is now guiding for a market decline of 3% to 5% having previously said that sales would drop by 2.2% in 2017. "We continue to expect our network sales to perform in line with the market," said CEO Rajeev Suri in a company statement.
The update is another depressing signal for the makers of telecom network equipment. Earlier this month, Sweden's Ericsson AB (Nasdaq: ERIC) told analysts that it expected the radio access network market to shrink at a "high single-digit" percentage rate this year, after previously forecasting shrinkage of between 2% and 6%. (See Ericsson Shares Slump on Gloomy Q2 Update.)
Despite its gloomier outlook, Nokia Corp. (NYSE: NOK) beat market expectations for second-quarter profits, with operating profit up 73% year-on-year, to €574 million ($673 million), on an underlying basis, and net profit up 158%, to €441 million ($517 million).
Analysts polled by Reuters had been expecting an operating profit of €447 million ($524 million). Nokia's share price was trading up more than 5% in Helsinki during early morning trading following the publication of its second-quarter earnings report.
In a statement, Rajeev Suri paid tribute to "the entire Nokia team for delivering strong profitability" and said he remained confident that Nokia's networks business would achieve an operating margin of between 8% and 10% for the full year, in line with original expectations.
The performance is testament to Suri's sure-footed management of the business and provides further proof that Nokia's €15.6 billion ($18.3 billion, at today's exchange rate) takeover of rival Alcatel-Lucent last year -- aimed at giving Nokia a strong core and fixed networks business in addition to its mobile equipment one -- has gone more smoothly than most observers had expected. (See Nokia, AlcaLu Steady Ship on Costs Before Tie-Up.)
It is also in sharp contrast to the profitability performance of Ericsson, whose own operating margin shrank to as little as 0.6% in the second quarter, once restructuring charges were stripped out. CEO Börje Ekholm, who took charge of Ericsson at the start of the year, is focused on restoring profitability at the ailing company, and targeting an operating margin of 12% by 2019, but Ericsson currently looks far off the pace. (See Ekholm's Vision of Slimmer Ericsson Lacks Detail & Dazzle.)
Unsurprisingly, given Nokia's warning about worsening conditions, there was gloomier news for the company on the sales front, with revenues at the networks business falling 5%, to just under €5 billion ($5.9 billion), due mainly to setbacks in the market for mobile and fixed broadband equipment.
Group sales fell just 1%, to about €5.6 billion ($6.6 billion), thanks to growth at Nokia Technologies, the small intellectual property arm of the company, which settled a patent dispute with iPhone maker Apple Inc. (Nasdaq: AAPL) in May. (See Eurobites: Nokia & Apple Bury the Hatchet.)
Under that agreement, Nokia will receive more generous royalty payments from Apple in future, supply network equipment to it and partner with it on digital health initiatives. Second-quarter sales at Technologies were up 90%, to €369 million ($433 million).
Suri also hailed progress on various strategic fronts including Nokia's growth plan to expand into a number of vertical sectors "adjacent" to its main telecom market. (See Nokia to Create Standalone Software Biz, Target New Verticals.)
"We saw double-digit growth in orders in most of the verticals we are targeting, and added new customers at a significantly faster rate than one year ago," he said in a company statement. "And we launched new IP routing products that will put us in a strong competitive position with both our traditional customer base and our new target markets when the products are available at scale next year."
In June, Nokia heralded a major technological breakthrough with the unveiling of a new routing platform and network processor (the FP4) whose capabilities seem to go far beyond those of rival products or anything it currently sells. Nokia says the UK's BT Group plc (NYSE: BT; London: BTA) and China's Xiaomi -- with which it closed a separate licensing deal in the second quarter -- have already expressed interest in the new products. (See Nokia Heralds Fastest Network Processor Ever.)
Nokia's strategic efforts to create a standalone software business are also starting to bear fruit, Suri told investors, with sales at the applications and analytics business up 9%, to €365 million ($428 million).
But the overall IP networks and applications division had a tougher time, reporting a 4% dip in revenues, to about €1.4 billion ($1.6 billion), because of current weakness in the markets for IP routing and optical networking equipment. Nokia clearly hopes the FP4 processor and new routing platforms will fuel a turnaround in this area.
The large global services business, meanwhile, reported revenues of about €1.4 billion ($1.6 billion) -- the same as in the year-earlier quarter -- and grew its operating profit by 262%, to €123 million ($144 million), thanks to cost-saving efforts.
While both Nokia and Ericsson have blamed a downturn in the telco market for their sales difficulties, they have also been under relentless competitive pressure from Chinese rivals Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), which have continued to increase their revenues despite the challenging conditions. (See ZTE Net Profit Up 30% in First Half.)
Investors hope the arrival of next-generation 5G technology in the next two years will fuel a new cycle of equipment spending by service providers, but 5G is likely to "co-exist" with 4G for many years, Nokia has cautioned, and its rollout could take many years.
Ericsson's Arun Bansal, who heads up the Swedish vendor's European and Latin American businesses, does not expect telcos to increase their spending significantly unless new services start to deliver revenue growth for them, he recently told Light Reading during an interview. (See Ericsson: 5G Unlikely to Kickstart Telco Spending.)
— Iain Morris, , News Editor, Light Reading