Nokia Tumbles on Weak Results, Insists Good 5G Times Lie Ahead

Finnish vendor insists the second half of 2018 will be much better than the first half as customers start to invest in long-awaited 5G networks.

Iain Morris, International Editor

April 26, 2018

9 Min Read
Nokia Tumbles on Weak Results, Insists Good 5G Times Lie Ahead

Nokia has served up disappointing news for investors with first-quarter results that show a decline in network spending by its customers and an operating loss when figures from the small licensing business are excluded.

Shares dived more than 8% at one point during morning trading in Helsinki, after the Finnish vendor reported a 9% drop in overall sales, to about €4.9 billion ($6 billion), and a 59% fall in net profit, to just €83 million ($101 million), compared with the year-earlier quarter.

At only €239 million ($291 million), total operating profits clearly missed analyst expectations of €369 million ($449 million), according to a Reuters poll.

Q1 2018

Q1 2017

YoY change

Net sales




−Nokia's networks business




−Nokia Technologies




−Group common and other




Gross profit




Gross margin



-1.4 percentage points

Operating profit




−Nokia's networks business




−Nokia Technologies




−Group common and other




Operating margin



-1.5 percentage points

Net profit




Despite the setback, the Finnish equipment now expects its large networks business to outperform rivals this year, having previously guided for a sales decline in line with the market. It has also raised its outlook for the overall networks market to a sales decline of 1-3%, an improvement on the earlier forecast of a 2-4% decline.

Nokia Corp. (NYSE: NOK) explained that improvement by saying order intake had been "excellent" in the first quarter, especially in North America, where some of its customers are preparing to launch 5G services this year.

"We have clear visibility to 5G deals for large-scale commercial rollouts in the United States in the second half of the year," said Rajeev Suri, Nokia's CEO, in an earnings statement. Other "large-scale" 5G commercial rollouts are expected to start in 2019, he told investors.

Although not factored into the outlook, CFO Kristian Pullola told Light Reading that recent US moves against Chinese rivals Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) could also work to Nokia's advantage. ZTE currently faces a seven-year ban on the use of US components, while Huawei is reportedly under investigation for violating sanctions against Iran. (See US Investigating Huawei for Sanctions Violations – Report and ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)

"We come from a strong security background and are trusted from a quality point of view. We have a good chance to succeed in this environment," said Pullola. "We will monitor the situation and try to use any opportunity that would present itself in radio, routing or optical."

Figure 1: Nokia CFO Kristian Pullola: Hoping to benefit from ostracization of Chinese vendors in US. Nokia CFO Kristian Pullola: Hoping to benefit from ostracization of Chinese vendors in US.

Executives insisted revenues would have been flat without foreign exchange movements, but its networks business, which accounts for 88% of the total, still suffered a 3% year-on-year decline on a constant-currency basis.

Last week, Swedish rival Ericsson AB (Nasdaq: ERIC) said its own first-quarter network sales were down 2% in constant-currency terms, compared with the year-earlier period. (See Ericsson Takes Giant Leap Toward Profitability.)

One concern for investors is a weakening of both gross and operating margins at Nokia in the first quarter. The company's gross margin slid to 39.4%, from 40.8% a year earlier, while its operating margin declined from 6.3% to 4.8% over the same period.

Suri blamed the gross margin weakness on "regional and product mix" and said the figure would improve in the second half of the year.

"Geographically we saw growth in Latin America and the Middle East, which are lower-margin markets than North America," Pullola explained. "From a product point of view we had more services, more optical, less software and less routing, and those mix shifts meant lower margins."

Even though profitability has worsened, Nokia insists it is on track to realize cost savings of €1.2 billion ($1.46 billion) this year, compared with 2015. It continues to guide for an operating margin at the networks business of 6-9% this year and 9-12% in 2020.

Pullola denied there was a need for more rigorous cost cutting to boost margins, but overall employee numbers at Nokia changed little in 2017, falling to 101,731 from 102,687 the year before. That contrasts starkly with headcount development at loss-making Ericsson, which has axed around 14,000 full-time positions in the last year, giving it 97,581 full-time employees at the end of March.

"We have seen workforce reductions across the globe but we are reinvesting into business areas where we see growth in future, including software and enterprise," said Pullola. "Total workforce numbers are volatile depending on the type of business we take on, but overall we're on a reducing trend."

Next page: Spending slump

Spending slump
Like other network equipment makers, Nokia has been hit by a slump in spending over the last year as major customers have finished building out and upgrading 4G networks. Analysts have also previously blamed competition from aggressive Chinese rivals Huawei and ZTE for sales declines at Ericsson and Nokia.

Sales at Nokia's mobile networks business sank nearly a fifth in the first quarter, to €1.4 billion ($1.7 billion), although Nokia said the year-earlier quarter had been especially strong in North America.

It also reckons the breadth and diversity of its product portfolio -- following its takeover of Alcatel-Lucent in early 2016 -- gives it an important advantage over rivals such as Ericsson, which derives the bulk of its equipment revenues from the radio access network (RAN) market. (See Finn de Siècle for Alcatel-Lucent.)

"People see 5G as something more than just the next generation of radio and they do know that it will require re-architecting the network and working on different aspects including the core and transport," said Pullola. "Our offering there has strength."

Indeed, Nokia's hope is that its ability to satisfy "end-to-end" customer needs will translate into market share gains as operators start to invest in 5G networks.

"We … see a clear path to market share gains this year given our success in 4G expansion, 5G deals, IP routing in both the service provider segment and adjacent markets, and optical, driven by 5G and webscale customers," said Suri in his statement.

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

Even so, there have been some troubling signs for Nokia's mobile networks business in recent months, including, most notably, the loss of a major RAN contract with Deutsche Telekom AG (NYSE: DT) to Ericsson, which similarly aims to grow its market share this year. (See DT Ditches Nokia From Its German Radio Access Network.)

One danger is that price-based 5G competition leads to further margin erosion, although Pullola played down this risk. "We do typically see some price competitiveness during the early cycles of new technologies but you also have older technologies where there is margin improvement as investment levels start to fall," he said. "I do think the biggest driver [of margin improvement] will be a reversal in terms of the geographic and product mix headwinds."

Both Ericsson and Nokia might also benefit from the US clampdown on ZTE and Huawei, which are already prohibited from selling equipment to large US service providers. US authorities last week moved to ban US component sales to ZTE for seven years, saying the company had issued false statements after restrictions were lifted in 2017. They had previously accused the company of violating sanctions by selling equipment that included US-made components to Iran.

This week, those same authorities were reported to have launched an investigation into whether Huawei has also violated US sanctions against Iran.

Nokia's fixed networks business seemed to hold up better than mobile, reporting an 11% decline in sales, to €445 million ($542 million), compared with the year-earlier quarter.

But there were further disappointments at the global services unit, as well as the IP networks and applications division, with both of those businesses swinging to an operating loss in the first quarter. On the networks side, the only bright spot was a 12% increase in sales of optical network gear, to €363 million ($442 million).

From a group profitability perspective, Nokia remains heavily reliant on its Technologies-branded licensing division, which recorded a 48% increase in sales, to €365 million ($442 million), and saw operating profits more than double, to €274 million ($334 million).

Were it not for Technologies, and given a loss in the common group functions area, Nokia would have swung to an operating loss of €35 million ($43 million) in the first quarter, from a profit of €225 million ($274 million) a year earlier.

— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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