Is Nokia Losing the 5G Race?

Iain Morris
5/7/2019

The first few months of 2019 have been as frosty as a Finnish winter for Nokia. When the company reported its 2018 results in January, CEO Rajeev Suri warned investors not to expect any 5G boom in 2019, blaming slow progress on rollout and standardization hurdles. The first quarter turned out to be worse than analysts were expecting, with sales down 2% in constant currency terms and the gross margin shriveling by seven percentage points, compared with the year-earlier period. Nokia's share price has fallen 21% since late January.

None of this was in the original script. At the start of 2018, Suri's message was that market conditions would "improve markedly" for 2019 and 2020, "driven by full-scale rollouts of 5G networks." Nokia was supposed to be in a stronger position than its rivals, too. It has a much broader product portfolio than Ericsson, which is largely focused on the radio access network (RAN), and does not face the same political hostility as Huawei, which is trying to persuade governments it is not a conduit for Chinese spying.

Yet the performance by these two rivals brings up awkward questions for Nokia. Ericsson's revenues rose 7% organically in the first quarter and its gross margin was four percentage points higher than a year earlier. Huawei's sales grew 39% over the same period. It has not broken out quarterly results by division, but recently told analysts to expect "double-digit" growth in network sales this year, after a 1.3% dip in 2018.

Rajeev Suri must convince investors Nokia is not lagging rivals in 5G.
Rajeev Suri must convince investors Nokia is not lagging rivals in 5G.

If Nokia's malaise is down to standardization issues and weak spending by operators, then shouldn't Ericsson and Huawei be struggling as well? Any neutral observer comparing the three companies might conclude that Nokia is losing out. And a more granular study of financial results does little to dispel this notion. Sales at Ericsson's RAN-focused networks business rose 10% in the first quarter, on a constant currency basis, while Nokia's "mobile access" revenues fell 2% organically.

Negative publicity dogs the Finnish vendor, too. Its 5G shipments in South Korea are three months behind schedule, according to a local news site. In the UK, it is being phased out of the RAN by Vodafone, which prefers Ericsson and Huawei, and missed out on a 5G RAN deal with Three, which favored Huawei despite having used Nokia as a 3G vendor. In late 2017, Deutsche Telekom substituted Ericsson for Nokia as a RAN supplier in Germany.

One source who preferred to remain anonymous thinks Nokia has not timed its mobile upgrade cycle as well as Ericsson. The Finnish vendor has paid the price in some deals, he reckons. Speaking to analysts during Nokia's earnings call in late April, Suri acknowledged there were "short-term issues" regarding "radio roadmaps." Nokia found software defects and "instability" in consumer device chipsets when testing its 5G basestation software, he said.

Nearly 5G
But the Finnish vendor has denied it is losing market share and played down the significance of its software difficulties. In what seemed like a criticism of Ericsson, which has long touted the "software upgradability" of its RAN equipment, Suri told analysts during Nokia's earnings call that "software-only upgrades are meaningless, unless your hardware has the right capacity." He also suggested that chipset problems were a matter for the entire market, and not just Nokia.

Nokia has also yet to recognize some revenues because of internal accounting rules about software readiness. In Suri's own explanation: "Our revenue recognition policies and contractual terms require reasonable commercial availability and customer acceptance of our own system software before we can recognize revenue related to a new generation of mobile technology." These rules meant Nokia's first-quarter report did not include about €200 million ($224 million) in 5G revenues in North America. It expects to book those revenues later this year. At the company's networks business, an extra €200 million in the first quarter would have been the difference between sales growth of 10% and the 4% it reported.


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At least one analyst thinks Ericsson's results look stronger because of its involvement in Verizon's "non-standards-based fixed 5G project." Michael Genovese, an equity analyst with MKM Partners, who continues to favor Nokia over Ericsson, said in a research note that: "Nokia has won standards-based 5G business with Verizon that we think should positively inflect later in 2019."

Ericsson has also shown some willingness to compete aggressively on price to secure 5G market share. Warning that profit margins could suffer later this year, Ericsson CEO Börje Ekholm said: "It is no secret that we are taking contracts that can challenge profitability initially but are attractive in the longer term … It is a strategic imperative and we will continue to do that."

As for Huawei, the Chinese vendor's lack of transparency makes comparisons difficult. Responsible for sales growth in 2018, its enterprise and consumer divisions might have fueled the increase in first-quarter revenues, too. The impact of 5G competition on Huawei's profitability is unclear because the Chinese vendor does not disclose details of profit margins for its separate divisions.

What is known is that Huawei has been wrestling with the same kind of 5G standardization issues that are affecting Nokia. As recently as November, one major service provider relying on Huawei equipment was understood to be worried about incompatibility between basestation equipment and device chipsets. At the time, Huawei said it was trying to fix the problem through a software upgrade. Whether it has now done so remains unclear.

Nokia is evidently under some pressure to prove it is not falling behind its main 5G rivals. Any short-term panic is probably unwarranted. Suri made a good point when he told analysts that his company's software difficulties had to be understood "in the context of a technology cycle that will last well over the next decade and that is still in the process of maturing." But if results later this year do not finally show the marked improvement Suri has promised, the Finnish company's long winter could drag on.

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— Iain Morris, International Editor, Light Reading

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rkscarse
rkscarse
5/11/2019 | 8:58:41 AM
Re: Time to think again ...
Thanks for the insight Barry. You're piece was so well written, concise, pointed, and fair... at least to my mind, just an investor. 

From my perspective, everything you wrote supported what Suri said, and confirms that you, at least, attest to optimistic elements that don't just derive from hyperbole. 

I shall not hold you responsible for any failing the company might have in turning that optimism into results, but, still, I gain a confidence from what you wrote that leads me to believe today's value is woefully too little to represent Nokia's potential during the next, say, 18 months or so.

regards,

rks

 

 
barry.french
barry.french
5/7/2019 | 5:31:17 PM
Time to think again ...
I am a big fan of Light Reading and always appreciate the punchy writing and strong opinions.

Even when I don't agree.  

And, in the case of this opinion piece, there are some things that I agree with but many I do not.  With apologies for the long comment, let me explain.

First, the notion that "Nokia is losing the 5G race" is simply not true.  Far from it. We continue to rack up new 5G wins at an impressive pace and in a world where counting of "deals" is not always transparent, we are doing very well.  When we announced our Q1 results, we said that we had 36 5G contracts, including 18 with named customers.   And, we have added to that number since.

Second, Nokia's full portfolio does matter.  Half of the 5G deals that I just mentioned include portfolio elements that others do not have.  When we look at our internal customer satisfaction survey – where we are closing the gap to the market leader and increasing the considerable distance from the #3  – direct customer feedback on our end-to-end portfolio is very favorable.  And, the share of end-to-end and multi-business groups deals in our pipeline has continued to grow.  

Third, we did acknowledge that we have some short-term 5G radio roadmap issues.  But, here is what people need to understand.  Every vendor has issues; we just had the courage to say it.  Why am I so sure?  Because we have done tests of active 5G networks where Nokia and/or our competitors have a position.  We have seen that others face some challenges – like all data uplink taking place over the 4G network, not on the also-present 5G.  Dynamic resource scheduling and overall speed are two other areas where we have seen that Nokia's 5G is better.  This situation does not surprise me given our strong record of technology that performs very well in real-life deployments.

And, just so your readers understand, the chipset instability we found was not our equipment – it was in those used for consumer devices (i.e., your phone) – thus proving the point about an ecosystem that is still maturing. Is that an issue for the entire market? Absolutely. 

Fourth, you point to Nokia's soft Q1 results – and, it is true that they were.  But, we had guided that 2019 would have a soft first half and particularly weak Q1. We understand the reasons why and, as we said when we announced the quarter, we continued to hold to our full-year guidance.  You ask why others are not "struggling" and I would address that in two ways. To start with, I can't speak about the revenue recognition policies of others, but I know ours.  They are strict and for good reasons.   

In addition, I would also suggest that the "neutral observer" that you reference should take a bit broader perspective.  After all, a single quarter is hardly a trend.  Just go back to Q4 2018 and do a true "apples-to-apples" comparison with those that report their numbers publicly and you will see a very different story than Q1.  Sure, you mention that we were swapped in Germany, but we have swapped that competitor far more often than they have swapped us. And, despite some losses, our deal win rate suggests we are winning far more than we are losing. 

Finally, you mention Korea.  Initial deployment has been challenging for us and all other vendors. Key to understanding the situation, however, is the fact that we have a very strong market position with all the major operators in the country.  When you combine that with the much faster than expected demand, technology has not been the big issue but rather deliveries.  We have added production capability and are fast getting back on track.  We appreciate the support of our customers and are pushing incredibly hard to get more products to them as quickly as we possibly can.

To be fair, your piece includes facts and quotes from Nokia, mainly from our Q1 announcement.  That is appreciated.  Where we diverge, however, is on the real underlying story about Nokia.  In short, despite a soft first quarter, which we expected, I am confident that Nokia is extremely strong in 5G.

Many thanks, 

Barry French / Nokia

PS: Iain, beer is on me when we are next in same city! 
Clifton K Morris
Clifton K Morris
5/7/2019 | 7:30:41 AM
Nokia doesn't understand the US Market
Nokia is a real weirdo when it comes to implementing technology in the US.

Most of its work seems to be based on itellectual property acquisition, but a strategy based on bringing a product to market with a go-to-market plan seems very disheartening and sad.   Wrong people in key positions?

When it comes to hardware, well, all I can point to is the Nokia 6185.