Nokia Ups Guidance But Investors Take Fright

Nokia has plenty of enthusiasm, but unfortunately for the resurgent Finnish vendor it's certainly not infectious.

On Friday, at its first capital markets day since 2009, the company forecast an improvement in sales and profit margins for 2015 and then watched its share price slump by almost 5% to $7.86 on the New York Stock Exchange in the hours after its announcement. (See Nokia Lays Out Financial, Strategic Plans.)

It may have been Rajeev Suri's overuse of the word "flattish" to describe the market outlook that spooked investors. Clearly, some do not share the confidence of the company's CEO that Nokia Corp. (NYSE: NOK) will grow "slightly faster" than other players, winning market share from rivals big and small. Nor did financiers take heart from Suri's prediction that Nokia Networks , which generates the majority of the company's revenues, will deliver an operating margin of between 8% and 11% next year, up from an earlier prediction of between 5% and 10%. (See Nokia Ushers In New Era, Retires NSN Name for Nokia's business unit structure.)

One problem may have been that Nokia raised its guidance just a day after Ericsson AB (Nasdaq: ERIC) lowered its own forecasts for market growth and promised to slash annual expenses by $1.2 billion. (See Eurobites: Ericsson Plans $1.2B in Cuts.)

Unlike its Swedish rival, Nokia is hopeful it can avoid any layoffs as it trims costs, but Suri refused to rule them out. "You just don't know, but we can certainly realize efficiencies through better management," he told journalists.

Smaller rivals and IT upstarts could threaten Nokia's interim prospects, the CEO acknowledged. He insisted, however, that consolidation in recent years has eased some pricing pressure in the equipment market by reducing the number of global players to just three: Nokia, Ericsson and Chinese vendor Huawei Technologies Co. Ltd. . (That's a perspective that will be noted at Alcatel-Lucent (NYSE: ALU).)

Following the sale of its handsets business to Microsoft Corp. (Nasdaq: MSFT), Nokia is by far the smallest of this trio, based on reported 2013 revenues. (See Microsoft Officially Closes Nokia Buy, NSN Braces for Tough Start to 2014 and Ericsson Flatlines in 2013, Trails Huawei.)

But Suri reckons it can poach market share from both ends of the industry by targeting opportunities in areas such as LTE, small cells and virtualization. "In Korea we've previously taken market share from the largest players, and in Japan we've taken it from the smallest players," he noted. "We need to build in areas where we are strong today as well as expand into new adjacencies."

Indeed, according to data from market-research company Dell'Oro Group , Nokia managed to increase its share of the LTE market substantially in the third quarter (see table below).

Table 1: Shares of Global LTE Market Held by Leading Vendors

Ericsson Huawei Nokia Alcatel-Lucent ZTE Samsung
Market share in third quarter 26.9% 22.7% 19.6% 13.7% 6.5% 5.3%
Change versus second quarter -1.4% 0.8% 5.7% -4.8% -1.1% 1.1%
Source: Dell'Oro

In addition, its recent financial performance has also been encouraging. Net sales were up 13% in the third quarter, to US$4.12 billion, compared with the same period last year, while operating profits at Nokia Networks rose from $272 million to $497 million during the same period. Ericsson, by comparison, flagged a 9% increase in third-quarter revenues, to $7.8 billion, but an 8% drop in operating profit, to $528 million. (See Eurobites: Born-Again Nokia Blooms in Q3 and Global Reach Helps Ericsson Grow in Q3.)

Geographic split
One positive is the solid position that Nokia has carved out for itself in China, where it recently signed a major 4G deal with China Mobile Ltd. (NYSE: CHL), the country's biggest mobile operator, worth $970 million. Yet it has looked relatively weak in other parts of the world, lacking major radio deals with the main service providers in the US, for instance. (See Nokia Networks Unveils $970M 4G Deal With China Mobile.)

As Suri was quick to point out, "adjacent" opportunities could also include areas such as 4G-based public safety systems. "We've focused on that in North America but could reach government customers in other parts of the world with the right channel partners," he said.

Another priority is turning around the underperforming Global Services outfit, whose revenues shrank by 5% in the third quarter. By addressing "pockets of growth," such as network optimization, managed services and systems integration, Nokia aims to bolster its performance in future.

By then, 5G could be well on its way. Talking to Light Reading on the sidelines of the capital markets day event, Hossein Moiin, the CTO at Nokia Networks, said his aim was to roll out a "pre-standardized" version of 5G in South Korea by 2018 and a "pre-commercial" service in Japan by 2020, in time for the Tokyo Olympics that year. A leadership position in this area, of course, might help Nokia to secure future radio business in some of the markets where it currently lags behind its rivals.

Want to know more about the latest developments in 5G? Check out our dedicated 5G content channel here on Light Reading.

Until that happens, Moiin is optimistic that operator spending on LTE-A will fuel revenue growth in markets where LTE has already taken off. The transition to the higher-speed technology will be similar to the earlier shift from 3G to HSPA, he says, while downplaying concern that margins may suffer because the upgrade will again mainly involve a software modification, and relatively little work on the hardware side. "We're now really a software company," he told Light Reading. "The shift from 3G to HSPA was more pronounced because we weren't [a software company] at that time."

Nokia's software expertise will be critical to the fortunes of its HERE digital mapping unit, which broke even in the third quarter but could "do better," according to Suri. That will mean standing up to competition from Google (Nasdaq: GOOG).

In the meantime, the Nokia Technologies business remains under pressure to monetize its substantial patents portfolio. It has indicated that operating expenses will rise "meaningfully" in 2015 as it continues to work on developing "licensable technologies."

"It will take time for those opportunities to come to fruition and I would suggest caution when it comes to timing," said Suri.

If he can deliver on the other parts of his strategic vision, the investment community may be willing to wait.

— Iain Morris, Contributing Editor

mhhf1ve 11/18/2014 | 3:55:52 PM
Re: Pocket Calculator Pricing Yup. Nokia's N1 is apparently going to be made by Foxconn... and it looks like an iPad clone, running Android... so Nokia is in the consumer devices market... and it's probably only a matter of time before it gets back into phablets and... phones.
[email protected] 11/18/2014 | 8:39:22 AM
Re: Pocket Calculator Pricing Now it's amusing to look back at yesterday's coverage of the 'Nokia device', to see the guesswork.

SO now there is a Nokia consumer device heading back to the shops, but it is no more than a licensing deal. Very inteersting approach - Nokia does not make it, or sell, it, or even support it. That is all done by the OEM partner. 
mhhf1ve 11/17/2014 | 6:02:17 PM
Re: Pocket Calculator Pricing Nokia sold its phone devices to MSFT... not all of its hardware.. In fact, Nokia seems to be launching an OTT set top box?

[email protected] 11/17/2014 | 12:34:18 PM
Re: Pocket Calculator Pricing Um, but Nokia no longer does devices.... it sold all of that to Microsoft....
jabailo 11/17/2014 | 11:49:31 AM
Pocket Calculator Pricing The issue for device makers, especially formerly high end ones, is that we're entering a time when $100 computers with networking are possibly the norm.  

And I also believe there's an inverse law based on network bandwidth.  As these new networks climb higher in bandwidth, we get to the point where the Chromecast topology -- of hosting everything cloud-side -- becomes the norm.    

Things like devices get more pervasive, and more powerful in some sense, but, paradoxically, cheaper and lighter because they have to do less.


[email protected] 11/17/2014 | 9:19:05 AM
Perspective for Nokia So there may be some re-assessment of the share price but the perspective needed is - where is Nokia compared with 1 or 2 years ago? IN a m uch better place.

How is it shaping up for the future? It now needs to turn the internal focus and drive that turned it around to the market, where it needs to fill in some gaping holes, one of which looks to have been partly addressed by the relationship with HP on cloud/open source



Sign In