Nokia Outperforms Ericsson in Mobile but Sees Margin PressureNokia Outperforms Ericsson in Mobile but Sees Margin Pressure

Nokia heaped further misery onto Swedish rival Ericsson Thursday morning with a set of results that showed growth in both sales and profitability for the final three months of 2017.

While Ericsson AB (Nasdaq: ERIC) appears stuck in a loss-making rut, its Finnish competitor said that net sales grew 5%, in constant-currency terms, in the fourth quarter, with net profit up 6%, to €716 million ($887 million), compared with the year-earlier quarter. (See Ericsson: Desperately Seeking Profitability and Ericsson Stuck in Loss-Making Rut, Offloads Majority Stake in Media Unit.)

Reported revenues fell 1%, to €6.67 billion ($8.26 billion), because of foreign-exchange effects, but there were small improvements across most lines of business, when these were stripped out, and major gains at Nokia Technologies, the company's small intellectual property business, following a patent agreement with China's Huawei.

Thanks to that agreement, Nokia's operating margin also registered an increase, rising to 15.1% in the fourth quarter, from 14% a year earlier. But operating profits at the networks business, which accounts for 87% of revenues, were down a quarter, to €647 million ($802 million), compared with the year-earlier period.

Like Ericsson, Nokia Corp. (NYSE: NOK) has complained about a downturn in mobile broadband equipment markets and been hit by competition from aggressive Chinese rivals Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763).

It warned investors that conditions would remain tough this year and expects the overall networks market to decline by 2-4%, a slight improvement on its former prediction of a 2-5% fall. "We expect our market to decline again in 2018, although at a slightly lower rate than our previous forecast, given early signs of improved conditions in North America," said Rajeev Suri, Nokia's CEO, in an earnings statement.

Nokia also reckons that its investments in 5G technology will squeeze profitability this year before margins recover in 2019 and 2020. It is guiding for an operating margin of 9-11% in 2018 and sees this rising to between 12% and 16% in 2020.

"For 2019 and 2020, we expect market conditions to improve markedly, driven by full-scale rollouts of 5G networks," said Suri. "As those rollouts occur, Nokia is remarkably well positioned … 5G requires a coordinated, holistic approach across all network elements, far beyond radio. That requirement plays to the strength of our end-to-end portfolio."

The remarks could be interpreted as a snub to Ericsson, which remains heavily focused on the development of radio access networks, and draws attention to Nokia's bold €15.6 billion ($19.3 billion, at today's exchange rate) takeover of Alcatel-Lucent in early 2016.

That deal appears to have left Nokia better equipped to address some of the current industry challenges, giving it both fixed-line and core network capabilities it had previously lacked.

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Nevertheless, it was in mobile broadband, where Ericsson has been struggling, that Nokia witnessed some of the biggest network improvements in the final quarter of 2017.

Accounting for about 37% of overall sales, revenues from mobile networks were down 4% on a reported basis, to around €2.47 billion ($3.06 billion), but up 3% in constant-currency terms, said Nokia.

The update will embarrass mobile-focused Ericsson, which on Wednesday flagged a 7% fall in revenues on constant-currency terms.

"The performance reflects the progress we have made since Q3 with our mobile product portfolio, and positions us well for the upcoming transition to 5G," said Suri.

On the fixed-line side, Nokia saw reported revenues slide by 6%, to €526 million ($652 million), but said there was no change in constant-currency terms.

Sales from IP networks and applications, parts of which are seen as an engine of future growth, dipped 1%, to €1.71 billion ($2.12 billion), but were up 5% when foreign-exchange effects were discounted. Most of the growth came from optical networks, while there was also a small improvement at the closely watched applications and analytics unit.

That unit is developing software for use in service provider networks and will be renamed Nokia Software from the first quarter of 2018. Nokia has previously outlined an ambition of creating a "significant" standalone software business with the margin profile of a large software company.

Nokia's large global services business was the only major division to report a revenue decline in constant-currency terms, with sales dipping 1%, once foreign-exchange effects were stripped out, and falling 7% on a reported basis, to €1.64 billion ($2.03 billion). Nokia blamed the shortfall on a disappointing performance by the "network implementation and care" side of its business.

At Nokia Technologies, sales rose by 79%, to €554 million ($686 million), with operating profit up 146%, to €389 million ($482 million). The vendor said it had signed a multi-year patent agreement with Huawei in the fourth quarter and recognized €210 million ($260 million) in non-recurring net sales.

— Iain Morris, News Editor, Light Reading