Nokia Share Price Tanks on Networks Gloom
Nokia's stock lost more than 11% of its value during early morning trading in Helsinki after the Finnish vendor warned investors that conditions in its main networks market would be slightly worse this year than previously indicated and forecast another decline in 2018.
By mid-morning, the share price had dipped by 11.8% to €4.50, despite Nokia reporting a sharp increase in quarterly net profit thanks to a licensing deal with South Korea's LG. However, it saw revenues shrink because of tough conditions in its main mobile infrastructure market.
Nokia Corp. (NYSE: NOK) flagged a near doubling in net profit for its July-to-September quarter, to €516 million (US$610 million), compared with the year-earlier period, despite a 7% fall in total sales, to about €5.5 billion ($6.5 billion).
It said the decline was 4% on a constant currency basis, with CEO Rajeev Suri heralding "strength in many parts" of the networks business, which accounted for 87% of sales in the third quarter.
Suri drew particular attention to growth at the global services and IP (Internet Protocol) routing businesses, as well as an increase in orders at its applications and analytics unit, which is central to Nokia's plans to create a major standalone software business with the margin profile of a large software company.
The company acquired much of its IP, global services and software expertise with last year's €15.6 billion ($18.5 billion, at today's exchange rate) takeover of Alcatel-Lucent. That move has given Nokia the portfolio of core, fixed-line and mobile services it needed to withstand the challenge from Chinese equipment giant Huawei, which last year overtook Swedish rival Ericsson AB (Nasdaq: ERIC) to become the world's biggest supplier to communications service providers.
Like Ericsson, though, Nokia has been hit by a downturn in the market for mobile network equipment, which accounted for about 29% of total sales in its third quarter.
Revenues at the mobile networks division fell by 17% in the quarter, compared with the year-earlier period, and Nokia is now guiding for a full-year decline in the overall networks market of between 4% and 5%, having previously forecast a decline of between 3% and 5%.
It has also issued guidance for 2018, indicating that it expects the market to shrink by 2% to 5% next year.
"That decline… is the result of multiple technology transitions underway, robust competition in China and near-term headwinds from potential operator consolidation in a handful of countries," said Suri in a statement accompanying the earnings report.
Despite the improvement in net profits, Nokia's figures point to a year-on-year decline in the operating margin for the networks business, which slipped to 6.9% from 8.2% in the year-earlier quarter.
On a more positive note, Nokia appeared to make good progress on expanding its business into a range of key vertical markets outside the telecom sector. Without disclosing details of actual revenues, Suri claimed that sales to these customers were up 8%, excluding Alcatel-Lucent's third-party integration business, which Nokia is winding down.
"We also added more than 60 customers in these adjacent markets so far this year, including China Pacific Insurance Company, the first large enterprise win for our Nuage business in China," said Suri.
Nokia has previously indicated that it expects these adjacent markets to grow at a compound annual growth rate (CAGR) of 13% over the next five years, with its mainstream telecom market expected to show a CAGR of just 1% over the same period.
Suri said Nokia was now assessing opportunities for additional savings in the cost-of-goods sold area. The company remains committed to its target of reducing annual costs by €1.2 billion ($1.4 billion) next year, compared with 2015 figures for the combined Nokia and Alcatel-Lucent businesses.
Nokia's licensing deal with LG came after it reached a "favorable arbitration outcome" with the South Korean firm and was largely responsible for a 37% increase in licensing revenues in the quarter, to €483 million ($571 million).
— Iain Morris, News Editor, Light Reading