Nokia bets on network slump ending soon
Nokia says the end of a network slump is in sight, forecasting a pick-up in demand from wireless carriers in about a year.
The stock jumped the most since May 2017 after Nokia told investors that profit would start to exceed expectations in 2020. That forecast overshadowed a warning that earnings in 2018 would be lower than analysts estimated as Nokia invests in new 5G network technology ahead of expected orders from phone operators.
After the stock lost nearly half its value in the past two years, CEO Rajeev Suri is testing investors’ courage to stick along for another tough year.
Nokia and rival Ericsson are betting that a slump in network demand will end when carriers start investing in fifth-generation wireless networks, which promise faster data speeds and better capacity, enabling everything from cars to refrigerators to be more connected.
“We expect 2018 to be challenging,” Suri said. It “will be that investment year and 5G will still be in trials and early precommercial rollouts but the fullscale rollouts will really begin in 2019 and 2020”. Nokia’s share price rose as much as 8.2% for the biggest intraday gain in more than two years and were up 8.1% at €4.19 at 12.21pm in Helsinki. The price fell 24% between Wednesday and October 26, when the company announced third-quarter sales below expectations and lowered its forecast for the network market in 2017.
Suri said Nokia saw 5G network deployments happening at an “accelerated” pace, prompting it to boost investment in those products. As earnings were expected to benefit down the line, the company pledged to increase its dividend in future, including in 2018.
“The company is really trying to shift investors’ focus from this year into 2020 when this technology cycle will turn more positive,” Mikael Rautanen, an analyst at Inderes, said. “We should start thinking about the networks business in a longerterm perspective, because the underlying demand drivers for networks are still out there.”
Nokia and Ericsson have remained under pressure for years as wireless carriers have curbed spending amid stagnant revenue from cellphone customers. Nokia responded by trying to broaden its customer base to other industries, as well as boosting its software offering and reducing costs. In the fourth quarter, revenue declined 1% and Nokia expects the market for network equipment to shrink 2%-4% in 2018.
On Wednesday, Sweden’s Ericsson reported a larger-thanexpected sales decline for the last three months of 2017. The company was less upbeat on 5G than Nokia, saying it did not expect material contribution from the new network technology until after 2019. The two Nordic vendors also face tough competition from China’s Huawei Technologies.
Nokia’s forecast for its technologies unit, in charge of patent licensing, should provide comfort to investors concerned about network demand, Rautanen said. In 2017, Nokia had recurring licence revenue of €1.3bn and said it expected a compound annual growth rate of 10%, from 2017 to 2020.
“Investors have ignored the earnings growth in technologies,” Rautanen said. “That will offset the weak margins in the networks business.”