Fearing they would be caught short in the depths of the pandemic, people raided supermarket shelves and built toilet-roll towers at home. The telecom equivalent was a scramble for mobile network parts, prompted by component shortages but ultimately making them even worse. As operators run down the inventories they amassed, their suppliers are feeling the squeeze. Days after Ericsson blamed "inventory adjustments" in North America for a weak set of results, Nokia has aired a similar complaint.

But the Finnish vendor turned in a stronger first-quarter performance than its Swedish rival. Like Ericsson, it has picked up new 5G business in India to compensate for the North American slowdown. Margins suffered partly because this country in the early stages of 5G rollout is far less profitable than the more developed US market. Yet Nokia's mobile network sales grew year-over-year in constant-currency terms, while Ericsson's fell 2%. And the Finnish company's similarly big network infrastructure unit seemed unaffected by toilet-roll mentality.

Headline revenues at Nokia rose a tenth, to nearly €5.9 billion (US$6.5 billion), and were up 9% on a like-for-like basis. Unlike Ericsson, Nokia also managed to boost net profit, which grew 32%, to about €289 million ($317 million), thanks to the network infrastructure performance. Previously, it had been telco investment in last-mile fiber that lifted sales there. Spending now seems to have shifted to optical networks. Overall network infrastructure sales were up 13%, to about €2.2 billion ($2.4 billion), and its operating margin gained 5.4 percentage points, to reach 15.3%.

Figure 1: Nokia CEO Pekka Lundmark shows off his company's new logo at MWC.
(Source: Nokia)

Investors were nonetheless upset by the mobile slowdown and weaker results than analysts had expected, sending Nokia's share price down about 6% by lunchtime in Helsinki. That left it 19% lower than it was five years ago. Although mobile sales rose 13%, to almost €2.6 billion ($2.9 billion), operating profits dropped a fifth, to €137 million ($150 million). Blaming inventory build-up in North America for the results, and indicating that a "correction" would continue this second quarter, CEO Pekka Lundmark remained upbeat about the 5G outlook on a call with reporters earlier today.

"When we look at the big picture, there is actually still a lot of 5G to be built even in North America," he said. "One indicator we are tracking is the share of basestations in the networks that have been upgraded to the midband range and that is only at about 50% in the US. When we look globally outside China, that rate is only 20%. That rate to us indicates we are still early in the 5G rollout."

Figure 2: Nokia's share price in Helsinki ( euro ) (Source: Google Finance)

Nokia also managed a headline operating margin of 7.3% for the quarter, compared with the 4.9% reported by Ericsson earlier this week, and that means it is under far less immediate pressure to slash costs. Years of restructuring after its €15.6 billion ($17.1 billion, at today's exchange rate) takeover of Alcatel-Lucent in 2016 left it with a workforce of about 86,900 employees last year, down from a peak of 103,100 in 2018. Lundmark has previously said he envisages having between 80,000 and 85,000 people when the latest program, aimed at reducing costs by €600 million ($657 million), is finished.

Ericsson's heavier exposure to 5G, as a mobile-only vendor, is not the only big difference between the two companies. Last year, the Swedish firm splashed $6.2 billion on the takeover of Vonage, a loss-making software business that swelled employee ranks and chewed into profits. This year, it plans to cut 8,500 jobs, about 8% of its December total, to protect margins.

Getting enterprising

Since buying Alcatel-Lucent, Nokia has been relatively inactive on the takeover trail. And with Vonage under its belt, Ericsson now has a major platform for playing a brokerage role between app developers on one side and networks on the other. With a uniform set of application programming interfaces (APIs) for a huge community of telcos, it believes it can generate money for itself and its customers by exposing valuable network features to the companies that write software.

So does Nokia need to make a similarly big investment to advance its own ambitions in this space? "That is definitely an area where we are investing," Lundmark said in answer to a question from Light Reading. "How much those investments will be and what it will require is a totally different question. But it is an investment area, and we share on a general level this vision on network APIs."

In the meantime, Nokia's sales to customers in the "enterprise" part of the market are booming. Results out today show they soared 62% on a constant-currency basis for the first quarter, to about €566 million ($620 million), thanks largely to business with Internet companies and organizations building their own private wireless networks. It means the enterprise business today accounts for roughly a tenth of total sales, up from just 5% four years ago. Enterprise, unsurprisingly, is one of Lundmark's big strategic priorities.

Figure 3: Headcount at Ericsson and Nokia (Source: companies)

Cloudy prospects

A worry is the performance of Nokia's cloud and network services unit. It recorded a small operating loss of €20 million ($22 million) in the quarter and has made just €323 million ($354 million) on sales of €7.2 billion ($7.9 billion) since it came into existence in 2021. Nokia blamed a shift from software sales to "lower margin hardware" business for the first-quarter performance, but this unit seems to be one that is struggling with profitability.

Nokia Technologies, the licensing unit, also had a disappointing quarter, with operating profit down a third, to €149 million ($163 million). One licensee exercised an option last year that meant all its outstanding revenues were recognized in the final quarter, and there were lower contributions from a smartphone vendor "whose market share has meaningfully declined," said Nokia.

Lundmark, though, is forecasting total sales growth this year of between 2% and 8% in constant-currency terms, and guiding for an operating margin (on a comparable basis) of between 11.5% and 14%. That would point to a strong recovery in the second half of the year, when mobile network inventories are depleted and operators need to spend once again. For both Nokia and Ericsson, the sooner components are flushed out of the storeroom and into the field the better.

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— Iain Morris, International Editor, Light Reading