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Nokia Forecasts Sales Decline in 2017, Shares Fall

Iain Morris
10/27/2016
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Nokia has swung to a net loss and reported a sharp fall in sales for its July-to-September quarter, predicting that revenues in its main addressable market will continue declining at a "low single digits" rate in 2017.

It also now expects to see a "declining capital expenditure environment in 2016" for its overall addressable market, having previously forecast that conditions would be "flattish" over the entire year.

The Finnish vendor, which completed a €15.6 billion ($17 billion, at today's exchange rate) takeover of rival Alcatel-Lucent earlier this year, has been hit by the same weak spending conditions that have caused turmoil at Sweden's Ericsson AB (Nasdaq: ERIC), which reported its first quarterly net loss in four years earlier this month. (See Ericsson Swings to First Net Loss in 4 Years.)

Nokia Corp. (NYSE: NOK) bought Alcatel-Lucent (NYSE: ALU) partly to create a stronger rival to fast-growing Huawei Technologies Co. Ltd. , but the two companies continue to experience wildly contrasting fortunes.

While sales growth at the Chinese vendor shows little sign of slowing down, Nokia saw revenues drop by 7% on a like-for-like basis in the third quarter, to about €6 billion ($6.5 billion), compared with the year-earlier quarter. Even on a more favorable constant-currency basis, Nokia's revenues were down 6%. (See Is There No Stopping Huawei?)

Nokia also reported a loss of €133 million ($145 million), compared with a profit of €188 million ($205 million) a year earlier.

On a more encouraging note, the company fattened its gross margin to 39.7% from 37.7% in the year-earlier quarter, but its operating profit on a like-for-like basis tumbled 18%, to €556 million ($606 million).

CEO Rajeev Suri has repeatedly downplayed expectations this year, warning investors that operating conditions are grim, and Nokia performed better than many analysts had apparently predicted.

Even so, investors were clearly disappointed by the earnings update, sending Nokia's share price down by more than 5% during early-morning trading in Helsinki.

Suri insisted the results were "solid," despite the headline declines, focusing attention on slight sequential improvements in net sales and profitability at the large networks business, which accounts for about 89% of total revenues.

"We were able to deliver these solid results despite market conditions that are softer than expected, particularly in mobile infrastructure," he said in a company statement. "As we look forward, we expect those conditions to stabilize somewhat in 2017, with the primary addressable market in which Nokia competes likely to decline in the low single digits for that year."

Despite efficiency measures, operating profits at the networks business fell 36%, to €432 million ($471 million), with sales dropping 12%, to €5.3 billion ($5.8 billion).


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Like Ericsson, Nokia has been taking action to reduce costs and aims to realize savings of about €1.2 billion ($1.3 billion) in 2018, compared with the combined operating costs of Nokia and Alcatel-Lucent in 2015 (excluding the small Nokia Technologies business).

For the 2016 financial year, the vendor expects sales to be lower than in 2015 and is guiding for an operating margin of between 7% and 9%.

Nokia has blamed belt-tightening among customers for the gloomy outlook but also acknowledged that efforts to absorb the Alcatel-Lucent business are partly responsible for its difficulties.

Following Ericsson's lead, Nokia has indicated that most of the pain is being felt in the mobile infrastructure market. A breakdown of results shows that sales of mobile network equipment fell by 15% in the quarter, to €3.3 billion ($3.6 billion), while the smaller fixed networks business enjoyed a 3% uptick in revenues, to €585 million ($638 million).

Nevertheless, overall network sales fell in all regions of the world, dropping by more than a fifth in Europe -- Nokia's second-biggest regional market after North America.

In the IP networks and applications business, which largely represents former Alcatel-Lucent assets, sales fell by 9%, to €1.4 billion ($1.5 billion), and by 8% in constant-currency terms, while operating profits plummeted 47%, to €106 million ($116 million).

The decline in what is supposed to be a growth market, and an area in which service providers are investing, is particularly troubling.

There was better news at the technologies unit, which sells licenses to other companies and was buoyed by a large deal with Samsung in the third quarter.

Sales rose by 109%, to €353 million ($385 million) and the division's operating profit was up 168%, to €225 million ($245 million).

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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