Nokia reported a sharp drop in quarterly earnings from its telecom network gear business, warning the market had turned more challenging due to tough competition in China and consolidation among wireless carriers. Shares in the Finnish company dropped more than 11 percent by 0739 GMT as it forecast that the market, where it competes with China’s Huawei and Sweden’s Ericsson, would fall for a third straight year in 2018.
The telecom network equipment industry is weathering the toughest part of a decade-long cycle, as demand for 4G and older 2G and 3G network equipment subsides, while volume contracts for next-generation 5G networks remain a few years out. Nokia’s network sales fell 9 percent in the third quarter to 4.8 billion euros ($5.7 billion) while operating profit in the business dropped 23 percent to 334 million. Average analyst forecasts in a Reuters poll were 5.0 billion and 432 million respectively.
Chief Executive Rajeev Suri said operators’ consolidation and technology transitions were slowing demand, while competition in China had toughened. “The early positioning for 5G is well underway in that country and the cost of gaining or even maintaining footprint is significant. We want to ensure the right long-term footprint, but not at any cost,” Suri told a conference call. “Operator consolidation and M&A activity are also creating some near-term headwinds,” Suri said.
Sources told Reuters this week that T-Mobile and Sprint, the third- and fourth-largest US wireless carriers, were laying the groundwork for a possible merger. Nokia estimated a global market decline of between 4 and 5 percent for full-year 2017, compared with a previous forecast of 3 to 5 percent, and a 2 to 5 percent year-on-year fall in 2018. “Significant new spending will only come when 5G accelerates,” Suri said, adding he believed those deployments would start in 2019. Nokia has lately outpaced Ericsson in the tough market thanks to its 15.6 billion euro acquistion of Franco-American rival Alcatel-Lucent last year. Ericsson last week reported its fourth consecutive loss-making quarter.
“For improvement in the networks business, it’s time to look at 2019. There’s no growth in sight before that,” said Mikael Rautanen, analyst at Inderes Equity Research, with an “accumulate” rating on the stock. Nokia’s total profit in the third quarter jumped 20 percent to 668 million euros, above analyst forecasts due to a one-off payment of 180 million euros from a settled patent dispute with LG Electronics. Once the world’s largest handset maker, Nokia sold its mobile phone business to Microsoft in 2014 and has since focused on networks and patents.