Nokia spies 'green shoots' but warns of plunging mobile sales

Telcos spent last year in a miserly mood, as far as their biggest suppliers were concerned. Just two days after Ericsson published results showing a 10% fall (on a constant-currency basis) in annual sales, Nokia has revealed an equivalent 8% drop, with reported revenues down 11%, to about €22.3 billion (US$24.3 billion). But there are signs the market will bottom out in 2024. "Even though challenges will continue in the first half, we are starting to see green shoots," said Pekka Lundmark, Nokia's CEO, on a call with reporters this morning.

The parsimony is not surprising. Operators, especially in North America, amassed inventory in the pandemic like preppers stockpiling food. They have been living off those goods ever since. Spiralling inflation and a widespread inability to grow telco sales have also prompted operators to rein in their expenditure after earlier splurges on network equipment. Much like Ericsson, Nokia has responded by announcing cuts. Across an organization of about 86,000 people, between 9,000 and 14,000 jobs are to go as Nokia tries to slash between €800 million ($872 million) and €1.2 billion ($1.3 billion) off annual costs.

But it could not prevent a dip in profitability last year, when its gross margin shrank to 39.7%, from 41.4% in 2022, and net income fell 35%, to about €1.6 billion ($1.7 billion), on a comparable basis. It is counting the cost of a recent decision by AT&T, the big US telco, to rip out Nokia equipment across one third of its radio access network (RAN) and instead shift to what Lundmark described as a "largely single-sourced" deal with Ericsson, which already serves the other two thirds of AT&T's network.

With Nokia estimating that AT&T accounted for up to 8% of its mobile sales last year, the latest forecast is that revenues at its largest business group will fall by 10% to 15% this year, on a constant-currency basis. That would follow a drop of 5% last year, when sales came in at less than €9.8 billion ($10.7 billion) and the operating margin shrank from 8.8% to 7.4%. This year, Nokia is guiding for a wafer-thin mobile margin of between 1% and 4%.

Staying upbeat on mobile

Yet while the mobile outlook remains gloomy – especially for the first half of the year – Nokia has managed to outperform the sector, Lundmark insisted. "I do want to point out that, while our net sales in mobile networks declined by some 5% for the full year in 2023, the market declined significantly more, so we actually continued to take market share in mobile networks in a weak market in 2023," he said in response to questions.

His message about this segment echoes the one issued by Ericsson CEO Börje Ekholm earlier this week – that a growing volume of smartphone data will ultimately force telcos to reopen their wallets. "Data traffic continues to grow 20% to 30% a year, so it is only a matter of time before operators will have to start investing again. Now, especially in 2023 and it seems the beginning of 2024, investments are low but that has to be a temporary thing because otherwise operators will not be able to deal with the capacity that is needed from their networks."

AT&T and Ericsson have promoted their deal as an "open" RAN, meaning that multiple vendors could theoretically be combined at any given mobile site. Yet it will counterintuitively make AT&T even more heavily reliant on Ericsson, which has acknowledged to Light Reading that it will provide most components. AT&T's stated financial motives imply it secured very favorable pricing by cozying up to one vendor. Could market circumstances, then, drive other telcos to do the same thing, with Nokia benefiting when it accounts for a bigger share of the network in question?

"In the big scheme of things, I believe that for now it is a one-off, but of course in all situations operators are always considering which suppliers to use and I believe that we are in a strong position here," Lundmark told Light Reading. "We have excellent feedback from customers on our product and technology competitiveness and in the last two years we have increased our 5G market share outside of China from 23% to 29%. Obviously AT&T is a setback, but we will still be way above the 23% level where we were two years ago."

Enterprise strength

The "green shoots" of which he speaks are seen primarily at Nokia's network infrastructure unit, which is guiding for constant-currency sales growth of between 2% and 8% this year and an operating margin of 11.5% to 14.5%. This would follow a substantial 9% revenue decline last year, when reported sales were about €8 billion ($8.7 billion). So what explains the forecast improvement and the contrasting fortunes with mobile?

"Overall, we had really good order intake in network infrastructure in Q4," said Lundmark, describing the recovery as "broad-based" across the separate IP, optical, fixed and submarine network segments. That seems largely due to spending outside the telco market, with sales to "enterprise" customers up 16% last year and now representing about a tenth of total revenues. Orders by Internet players for data-center products explain much of the uptick in IP networks. US government spending on broadband deployment has also begun to flow through, said Lundmark.

Nokia's smaller cloud and network services unit has been in divestment mode, transferring staff to Red Hat – as part of a tie-up with the IBM-owned software company – and more recently selling its device and service management platform business to Lumine Group. But reported full-year sales came in at €3.2 billion ($3.5 billion), down just 1% on a constant-currency basis, and its operating profit rose 44%, to €255 million ($278 million). This year, it expects sales to rise 1.5% at the midpoint of its guidance range.

There were also positive developments at Nokia Technologies, the company's profitable technology and brand licensing business, which has now concluded recent long-term deals with Apple, Honor, Oppo and Samsung. While its operating profit sank 39% last year, to €734 million ($800 million), it is expected to hit €1.4 billion ($1.5 billion) in 2024 after the spate of deals with the world's biggest smartphone makers. Its focus is now shifting from this market to growth areas such as the automotive sector and the Internet of Things, said Lundmark.

After proposing a dividend of €0.13 per share for 2023 and saying it will buy back €600 million ($654 million) worth of shares in the next two years, Nokia watched its stock rise 6% mid-morning in Helsinki. Yet the share price has fallen about 30% in the last year and 2024 seems likely to be another year of challenges. In the worst-case scenario, its guidance implies an operating profit at the mobile networks business of just €83 million ($90 million), down from €940 million ($1 billion) in 2022. Investors will need to buckle up.