Nokia sees weak first half but strong momentum later in 2018

HELSINKI/LONDON (Reuters) – Network equipment maker Nokia posted weaker than expected quarterly profits as telecom operators, particularly in North America, held off spending, but the company sees momentum building later in the year.

FILE PHOTO: A cyclist rides past a Nokia logo during the Mobile World Congress in Barcelona, Spain February 25, 2018. REUTERS/Yves Herman/File Photo

Nokia said its mainstay networks business got off to a slow start in the first quarter and was likely to remain soft in the current second quarter. However, the market for next-generation 5G equipment would start to take off in the second half of 2018.

Shares in the Finnish company tumbled almost 8 percent to 4.55 euros at 0745 GMT.

“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.

“We are confident we can outperform a strengthening (network) market and meet our full year guidance,” he added.

Nokia, which competes with Sweden’s Ericsson, Huawei [HWT.UL] and ZTE, both of China, said the battered network industry was poised to bounce back as commercial roll-outs of next-generation 5G networks start to take off later in 2018 in North America, its biggest market.

First-quarter group earnings before interest and taxes (EBIT) fell 30 percent from a year ago to 239 million euros ($291 million), clearly below analysts’ average forecast of 369 million euros in a Reuters poll.

Struggling Ericsson last week stirred recovery hopes by beating quarterly profit expectations as its cost savings started to take effect.

“FAST AND BIG” 5G

Most of Nokia’s profit was generated by the company’s profitable patent licensing business where earnings grew 136 percent.

The Nokia logo is seen at the Mobile World Congress in Barcelona, Spain, February 28, 2018. REUTERS/Sergio Perez

Suri said the results were buoyed by patent royalty payments from newer Chinese smartphone suppliers and its licensing deal with HMD Global to market consumer devices under the Nokia phone brand.

The company has weathered several years of declining revenue since demand for the current generation of 4G network gear peaked around the middle of the decade and is betting on a new cycle of network upgrades to lift it starting later in 2018.

“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.

“The short term looks weak, but … longer term, this report actually strengthened my confidence for them,” he said.

Nokia said it expected the global networks industry 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.

“Although there are some sceptics, we see 5G coming fast and coming big,” Suri told reporters.

Commercial rollouts would start in the second half of 2018 in the United States and be followed by large-scale rollouts in a variety of regions in 2019, also including China, Japan, South Korea, the Nordics and the Middle East.

Of China, Suri said: “Commercial deployments of 5G will start around the middle of 2019, although we know that if China decides to accelerate things, it changes very fast.”

($1 = 0.8214 euros)

Reporting by Jussi Rosendahl and Eric Auchard; Editing by Keith Weir