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Pekka Lundmark, Nokia's boss, is spending millions to capture new data center business after reporting the best margin in a decade.
In a world obsessed with artificial intelligence (AI), Pekka Lundmark's decision last June to pay $2.3 billion for Infinera looks increasingly like it could be a smart move of the human type. The case made by Nokia's CEO was largely that the US optical equipment maker would boost his company's exposure to the fast-growing market for AI data center connectivity products. Ahead of the deal's completion, now expected by the end of March, revenues at Nokia's data center-serving units are surging.
Thanks partly to contracts with Microsoft, UK-based Nscale and others, sales at the network infrastructure business group – housing Nokia's optical, Internet Protocol (IP) and fixed assets – were up 19% year-over-year (17%, on a constant-currency basis) for the final quarter of 2024, to more than €2 billion (US$2.1 billion). That fueled a 10% revenue increase for Nokia, to just less than €6 billion ($6.2 billion), and helped lift the company's operating margin by 3.8 percentage points year-over-year, to 19.1%. It is, Lundmark told reporters earlier today, "the highest since 2015." On a comparable basis, Nokia's net profit soared 76%, to €977 million ($1.02 billion).
This was an undeniably strong performance by Nokia, whose share price opened about 3% higher in Helsinki today and has gained 29% in the last year. The Finnish equipment vendor has clearly had its fair share of problems in recent years, including notable setbacks at mobile networks, still its largest business group. Not so long ago, mobile with its portfolio of 5G products would have been seen as the motor of growth for Nokia. These days it seems to be all about network infrastructure.
Could anything derail this part of the business? The last few days have been marked by a mini crisis of confidence in US technology stocks after DeepSeek, a Chinese AI developer, showed off a model that appeared to need less processor power than American rivals like OpenAI would consume. If more efficient models result in lower spending on data center chips, it could weaken the outlook for connectivity vendors. The share price of Ciena, an Infinera competitor, slumped a fifth on January 27 amid investor concern about the implications.
But Lundmark sounds cautiously optimistic on the DeepSeek story. "It's too early to say exactly what this week's AI developments will mean," he said in response to a Light Reading question. "Our angle on this is of course that we want to break into data center markets that are fueled by AI, and we expect that the more competition there will be in AI, the more intense that AI race will be. It should be a good thing for the data center market, where we are a small challenger today."
Besides buying Infinera, he is, then, to pump another €100 million ($104 million) each year into operating expenses attached to data center IP networking, with funds divided between research and development and what Lundmark described as "channel creation." The hoped-for return will be an additional €1 billion ($1.04 billion) in sales by 2028. A five-year deal with Microsoft, he pointed out, already covers 30 countries.
Mobile market weakness
Still, the latest guidance is for a group operating profit of between €1.9 billion ($2 billion) and €2.4 billion ($2.5 billion) this year, much lower than the guidance range of €2.3 billion ($2.4 billion) to €2.9 billion ($3 billion) it presented a year ago for 2024. "When it comes to the outlook, we made €2.6 billion [$2.7 billion] roughly last year, but throughout the year we've been calling out some one timers that will not repeat themselves during this year," explained Lundmark in response to a question from Bloomberg.
Those one-offs included about €400 million ($416 million) in license payments from Chinese smartphone makers as well as a settlement with AT&T, said Lundmark. The US telco struck a deal in December 2023 with Swedish rival Ericsson that involves replacing Nokia kit across about one third of its nationwide footprint. That partly explains a 21% drop in mobile network sales last year, to about €7.7 billion ($8 billion). But there was some improvement in the fourth quarter when revenues fell just 1% year-over-year, to about €2.4 billion ($2.5 billion).
Nokia has been hacking into its mobile networks unit as part of a group-wide cost-saving program. Its goal is to save between €800 million ($832 million) and €1.2 billion ($1.3 billion) in annual costs by the end of 2026, compared with 2023. That would leave Nokia with between 72,000 and 77,000 employees, down from 86,000 when plans were first announced, and between 50% and 60% of the savings are expected to be found within mobile networks, Nokia indicated in its latest earnings report.
In July, when he last provided an update on staff numbers, Lundmark revealed Nokia then had fewer than 80,000 employees, having cut 6,000 jobs – mainly within mobile – since the previous September. Figures published in the latest earnings report show Nokia was able to realize annual gross cost savings of about €450 million ($468 million) last year.
Profitability, however, has recently declined within mobile, which reported an operating margin of just 7.7% for the fourth quarter, down from 11.5% a year before. This was also despite efforts to maintain "pricing discipline" against Ericsson, Huawei and other 5G rivals. But contract wins boosted Nokia's mobile footprint by a net total of 18,000 sites (wins minus losses), said Lundmark, who blamed recent margin weakness on earlier one-offs that flattered profitability, including the AT&T settlement.
Technologies prints more money
Overall one-offs appear to have contributed about €700 million ($728 million) to last year's operating profit. Deducting that accordingly produces a figure of €1.9 billion ($2 billion), which implies Nokia anticipates growth of about 13% in operating profit this year – minus the one-offs it recorded for 2024 – at the midpoint of its latest guidance.
The bottom line, as usual, was boosted by the profit-generating machine of Nokia Technologies. The licensing group books nearly all sales as gross profit and had a fourth-quarter operating margin of about 77%, up from 67% a year before. That translated into an operating profit of €356 million ($370 million), a year-over-year increase of 111%. But cloud and network services, the other one of Nokia's four main business groups, also had a decent quarter, with sales rising 8% year-over-year, to just less than €1.1 billion ($1.14 billion), and operating profit up 6%, to about €236 million ($246 million).
Some Nokia employees may enjoy looking at the recent contrast with fierce rival Ericsson. The Swedish company's share price is currently down about 5.8% in the last month after its latest financial report presented a bleak outlook for the radio access network market, with research firm Dell'Oro guiding for zero growth in its size over the next five years. A 4% increase in Nokia's share price over the same period points to some investor confidence in a data center growth story that mobile-only Ericsson simply does not have.
Update: The original version of this story implied the €100 million ($104 million) investment in IP networking was a one-off rather than an annual increase over a three-year period. This has now been corrected.
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