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Cutbacks are not endangering mobile competitiveness, Nokia CEO Pekka Lundmark tells Light Reading, noting deal wins around the world.
After a prolonged drought, the bosses of the world's network equipment vendors are desperate to talk about "green shoots" and "turning the corner," a phrase with which Nokia CEO Pekka Lundmark began his introduction to this week's third-quarter report. But many of the fields his company harvests still look barren, even if there are a few patches of growth. Net sales recovery is happening "more slowly than we expected previously," he told reporters on a call earlier today, while expressing optimism that the worst is now in the past.
Headline sales at Nokia fell 8% (7% on a like-for-like basis), compared with the year-earlier quarter, to about €4.3 billion (US$4.7 billion), with net income up 22%, to €358 million ($388 million), thanks to cuts and licensing wins. But Lundmark's current expectation is that Nokia will be "within the bottom half" of the €2.3 billion ($2.5 billion) to €2.9 billion ($3.2 billion) guidance range for its full year operating profit. Nokia's share price fell 5% in Helsinki after the update, although it remained 22% higher than it was at the start of the year.
At first glance, the ugliest strip is clearly the mobile networks business group. Accounting for about two fifths of quarterly revenues, it remains Nokia's largest unit. But its sales tumbled 19% year-over-year in the quarter (17%, like for like), to about €1.75 billion ($1.9 billion). The drop looks precipitous alongside the 4% dip that Ericsson has just reported at its equivalent unit.
After the Swedish competitor attributed much of its third-quarter growth to a recent boost in North America, the difference would seem to be largely explained by AT&T. Last December, the big US telco took the surprising decision to scrap Nokia, whose mobile equipment it had previously used across a third of its footprint, and become more heavily reliant on Ericsson, which already occupied the other two thirds. Work to replace Nokia has fueled much of the recent North American sales growth for Ericsson, which reported a 55% year-over-year increase in the region. Nokia's revenues, by comparison, dropped more than a fifth.
'We've won more than we've lost'
The other big mobile negative, one affecting both Nordic vendors, was a major slowdown in India, whose telcos were engaged in a rapid-fire rollout of 5G networks for much of 2023. Mobile revenues in the Asia-Pacific were down 30%, to €574 million ($623 million). Yet there will be hope that a recently announced 4G and 5G deal with Vodafone Idea, India's third-biggest telco, will bring improvements in future. Nokia is also reported to have secured additional 5G work for Bharti Airtel, the number-two player.
"The good news is that we signed multiple good deals during the quarter, and actually this has been the trend after the AT&T decision, which, of course, was a big negative almost a year ago," said Lundmark in response to a question from Light Reading. "We have won much more than we have lost, and we have continued to increase our market share outside the AT&T decision." Contract wins in Brazil, Japan, India, New Zealand and Vietnam were all announced in the quarter.
Does this mean next year will bring a return to mobile growth? Conditions remain frosty, after all, and Omdia, a Light Reading sister company, expects sales of radio access network products to fall by 7% to 9% this year. "There are expectations the market will return to growth next year, but, again, I think it would be naïve to expect that it will all of a sudden explode in terms of volume," said Lundmark. "But at least the worst should be over."
Nokia has taken a heavy axe to mobile costs, though, in response to the downturn and the loss of that AT&T contract. When he provided an update in July for the second quarter, Lundmark revealed that about 6,000 jobs, roughly 7% of the former total, had been scrapped in less than ten months across the whole company. And the mobile business group has been the one most affected, he revealed.
On the plus side, it has preserved and lifted profitability within mobile, which reported a third-quarter gross margin of 39.8%, up five percentage points year-over-year, and an operating margin of 5.3%, compared with 4.6% a year before. The concern for analysts and investors may be that heavy cuts eventually hurt competitiveness. This is, after all, what appeared to happen years ago under previous management before the 5G portfolio was knocked back into shape.
"We are not doing cost cutting in such a way that we would sacrifice our R&D [research and development] output," insisted Lundmark. Nokia's overall R&D spending has risen 2% for the first nine months of the year, to €3.17 billion ($3.4 billion). The cuts Nokia is making outside that area will ensure Nokia can generate a double-digit operating margin with lower sales, said Lundmark.
"When we started the cost cutting, we said that we target to lower the required volume for double-digit profitability from €11.5 billion [$12.5 billion] to €10 billion [$10.9 billion]," he said. "Now we are actually lowering that further, a bit. And, again, without sacrificing R&D output, our new target is now around €9.5 billion [$10.3 billion] by the end of 2026. It is going well, and it is going faster than we originally thought."
The value of knowhow
Outside mobile, the situation for Nokia looks better. Revenues recorded by the large network infrastructure group were down just 1%, to €1.53 billion ($1.66 billion), and up 1% on a constant-currency basis. "This growth in network infrastructure was driven by North America, which was previously one of the first regions to slow," said Lundmark, highlighting worldwide constant-currency growth rates of 9% in the fixed networks subdivision and 4% in IP networks. What Nokia has lost at AT&T in mobile it has partly made up for in fixed, landing a multi-year deal to roll out next-generation fiber technology for the operator.
At cloud and network services, the smallest of Nokia's three main business groups, sales dipped 5%, to €702 million ($762 million). But Lundmark reckons Nokia is leading the market in the 5G core subsector, and the unit's operating margin rose 4.4 percentage points, to 9.3%, after the previous divestment of device management and service management platform businesses. Last year, Nokia also quit the market for cloud infrastructure platforms, identifying Red Hat as its preferred partner in this field and transferring about 350 employees to the IBM subsidiary.
All this leaves the small but extremely profitable Technologies unit. Sales there were up 36%, to €352 million ($382 million), thanks to "previously signed smartphone license agreement renewals," said Nokia. And €242 million ($263 million) was recorded as operating profit, an increase of 34% on the year-earlier figure. The current difficulty of shifting products makes that intellectual property look more valuable than ever.
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