Nokia posts profit warning amid tough economic environment

Telecom equipment vendors face difficult times as their customers reduce spending in response to a challenging economic environment. Turbulence has now forced Nokia to cut its outlook for 2023 net sales and operating margins.

The Finnish company announced today that it has revised its 2023 net sales outlook, which previously ranged between €24.6 billion (US$27.6 billion) and €26.2 billion ($29.4 billion), to between €23.2 billion ($26 billion) and €24.6 billion ($27.6 billion). Nokia has also updated its comparable operating margin outlook for the year to 11.5%-13% from the previous 11.5%-14% range. It may still be hoping for a recovery in the second half of the year as operators deplete their stocks.

Its guidance for free cash flow conversion from comparable operating profit, meanwhile, remains at 20% to 50%. Nokia also says it remains committed to its long-term goals of "growing faster than the market and delivering a comparable operating margin of at least 14%." The company's share price, nevertheless, fell in response to the news, hitting €3.52 – the lowest price since April 2021 – before rebounding slightly.

The change in guidance, says Nokia, is due partly to the macroeconomic environment, with high inflation and rising interest rates affecting customer spending plans. As a result, projects have started slipping into 2024, particularly in North America.

"Inventory normalization" is also to blame, according to the company, following supply chain challenges. There has been a tendency to stockpile equipment in recent years as shortages plagued the industry. But with the situation returning to normal, companies are reducing stocks.

Global headwinds

The vendor is not alone in facing this challenging environment – Ericsson today posted its Q2 results, reporting a 9% slump in group organic sales year-over-year as US sales fell sharply and were only partially offset by strong performance in the Indian market.

Nokia is due to release second-quarter and half-year results for 2023 on June 20. It expects net sales to stay flat year-over-year on a constant currency basis, at €5.7 billion ($6.4 billion). Its net operating margin should be around 11%, with the company's operating profit receiving a boost of around €80 million ($89.8 million) from Nokia Technologies, the licensing unit.

The vendors' problems are perhaps not entirely surprising, with both companies already affected by inventory adjustments in Q1. Nokia, which started the year in an arguably stronger position than Ericsson, seemed the less affected of the two. Its network sales grew, while its Swedish rival saw them shrink by 2%.

Other equipment manufacturers have also been impacted by similar issues, with analysts warning of an overall slowdown in demand for telecom equipment. While analysts at Dell'Oro expect worldwide telecom capex to decline in 2023, Omdia – Light Reading's sister company – thinks global telco capex will grow by 1% this year, despite headwinds in the form of declining telco revenues.

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— Tereza Krásová, Associate Editor, Light Reading