HELSINKI/LONDON: Nokia posted a big drop in profits at its mainstay
network equipment business as operators, particularly in North America
held off spending, but it sees momentum building later in 2018 as the
market for next-generation 5G networks takes off.
The Finnish
company reported operating profits at its network business tumbled 87
percent, and said that the business would likely remain soft during the
current quarter.
"We expect an atypical seasonal trend, with
softness in the first half of the year, offset by a very dynamic second
half," Chief Executive Rajeev Suri told reporters following the report.
"We are confident we can outperform a strengthening (network) market and meet our full year guidance," he added.
Its shares recovered to end down less than 1 percent on the day after falling almost 9 percent earlier.
"Nokia's
Q1 results were much weaker than expected...but management confidence
has increased on full year outlook," UBS said in a research report. It
recommends clients buy the stock.
Nokia's CEO said the battered
industry would bounce back as large-scale commercial roll-outs of 5G
networks start to kick in later this year in North America and 5G
build-outs in 2019 in China, Japan, South Korea, the Nordics and the
Middle East.
"Although there are some sceptics, we see 5G coming fast and coming big," Suri told reporters.
The
industry, including Sweden's Ericsson and China's Huawei and ZTE has
struggled for years after demand for the current generation of 4G mobile
broadband equipment peaked.
He added that a US ban on exports to
China's ZTE over alleged Iran sanctions violations could play to
Nokia's long-term advantage, while adding that it was too early to
evaluate the impact.
Reports on Wednesday that the US could level
similar sanctions on Huawei over Iran could be a boon for Western
network suppliers such as Nokia, analysts said.
On Thursday,
Nokia forecast the global network market to fall 1-3 percent this year, a
slight improvement from its previous forecast of a fall of 2-4 percent,
and added its own sales would outperform the wider telecom equipment
market.
PATENT BUSINESS PAYS OFF
"We are at the very
bottom of the pothole, right between technology cycles," said Mikael
Rautanen, analyst at Inderes Equity Research, with a 'buy' rating on the
stock.
Rautanen said Nokia looked better positioned to benefit
from the 5G era than arch-rival Ericsson, thanks to the Finnish firm's
2016 acquisition of Alcatel-Lucent, which broadened its portfolio to
include both mobile and fixed-line network gear.
Loss-making
Ericsson has been going through broad restructuring and last week
stirred recovery hopes by beating market expectations on the back of
cost savings.
"Nokia has an important competitive advantage as
we're going to 5G, but it remains to be seen how it will be realized,"
Rautanen said.
Nokia's first-quarter group earnings before
interest and taxes (EBIT) fell 30 percent from a year ago to 239 million
euros ($291 million), well below analysts' average forecast of 369
million euros in a Reuters poll.
Net
sales in North America declined 15 percent in constant currency terms,
excluding currency effects, while China fell 9 percent. Latin America,
by contrast, jumped 48 percent, while Middle East, Africa and Europe
grew by lesser percentages.
While
the networks business made up 88 percent of Nokia's sales, a clear
majority of the bottom line was generated in its highly-profitable
patent licensing business.
Nokia
has recently struck licensing deals with all major handset makers
including Apple, Huawei, Samsung Electronics, LG and Xiaomi.
Nokia's
patent portfolio stems from when it was the world's largest handset
maker in previous decades. It failed to compete in touchscreen
smartphones and sold the phone business to Microsoft in 2014, leaving it
with the networks and patents.
