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Network Warning From Nokia

Nokia Corp. (NYSE: NOK) has cast a dark shadow over the global wireless infrastructure market by announcing that its network division will be reporting sales up to 20 percent lower than originally predicted for its first-quarter report this year (see Nokia Updates Forecast). As a result, first-quarter sales for the whole group are expected to be down year-on-year.

In a mid-quarter update, the Finnish giant, which last year cut its sales outlook six times and reported an annual fall in revenue for the first time in more than a decade, said it expected to post a pro forma earnings per share of €0.15 to €0.17 in the first quarter, compared with a previous target of €0.15 to €0.19.

According to the vendor, this fall is primarily due to weaker than expected sales and margins from its Nokia Networks wireless infrastructure division. In a conference call, Olli-Pekka Kallasvuo, Nokia's chief financial officer, told journalists that sales from its networks division are expected to decline by 15 to 20 percent as its carrier customers continue to cut infrastructure investment.

“Nokia Networks will post a substantial pro forma operating loss for the first quarter. The lower sales levels we are estimating make operating breakeven more difficult to reach without significant cuts in overall functions,” he admitted. “This is the major challenge for now, as we need to maintain certain levels of R&D and marketing that are necessary for the long-term health of the business."

While not prepared to divulge just what measures these "cuts" will entail, he did remark that this would form the basis of the company’s first-quarter earnings announcement on April 17th. Any future plans will follow last month’s announcement that 550 positions in the U.S., U.K., Sweden, and Finland are to be lost (see Nokia Cuts R&D). Nokia has already eliminated 9,000 jobs, or 15 percent of its total, over the past two years, following a tailspin in operating profits over the previous eight quarters (see Table 1 below).

Table 1: Quarterly Financial Performance at Nokia's Network Division (� millions)
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02
Revenue 2,022 1,896 1,659 1,957 1,436 1,474 1,545 2,084
Operating Profit 364 300 155 254 146 171 80 19
Source: Wireless Oracle


Despite a relatively solid performance from Nokia's mobile phone unit (where sales are expected to show growth for the fourth consecutive quarter), Lehman Brothers is quick to point out that this decline in overall revenue has been driven “primarily by continued cuts to 2G spending by operators across all regions.” The continued delay in the rollout of 3G technology only serves to make matters worse for the vendor (see 3G Startup Needs Cash!).

The impact this network shortfall will have on overall company growth could be severe, according to Dr Richard Windsor, communications equipment analyst at Nomura Holdings Inc. “The problem is that now Networks is loss making, it is destroying value attributable to Nokia Mobile Phones and is further damaging sentiment,” he writes in an email to Unstrung. Worse still for Nokia, he cites Alcatel SA (NYSE: ALA; Paris: CGEP:PA) as looking “increasingly attractive” to investors, as it has “double-digit margins in infrastructure to fall back on, and is less exposed to this industry as a sub-sector.”

March has been a month Nokia will be keen to forget. Last week it announced it had terminated its partnership with the BlueTel Group of companies with immediate effect (see Nokia Dumps Euro Partner). It will be hoping that yesterday’s wideband-CDMA deal with Huawei Technologies Co. Ltd. will give it something to smile about as it attempts to make inroads into an uncertain Chinese 3G market (see Nokia & Huawei Ink Dull Deal).

Given today’s news, its network business certainly needs something to celebrate.

— Justin Springham, Senior Editor, Europe, Unstrung

Editor’s note: Neither Light Reading nor Unstrung is affiliated with Oracle Corporation

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