Nokia shares plunged after the company said customers aren’t quite ready to increase spending on faster networks and are demanding price cuts.
Nokia still expects investments in 5G mobile equipment to pick up significantly in the second half, but some customers have so far funded 5G gear without expanding budgets. That’s put pressure on prices, CEO Rajeev Suri said, after Nokia posted a second-quarter earnings miss. The stock fell the most in nine months.
The Finnish equipment vendor expects a slump in demand to end when carriers start investing in networks that promise faster download speeds and better capacity, enabling everything from self-driving cars to remote surgery and traffic control. It’s facing tough competition from Chinese rival Huawei and Sweden’s Ericsson, which is showing signs of progress on a turnaround campaign started last year by CEO Borje Ekholm.
Nokia’s shares fell as much as 9.6%, the steepest decline among members of the STOXX Europe 600 Index. The stock was down 8.2% to €4.65 at 11.39am in Helsinki.
“While we are generally able to offset price reductions with cost erosion over time, it will take some time to catch up,” Suri said on a conference call with reporters.
In the second quarter, Nokia’s operating profit fell 42% to €334-million, short of the €374.5-million average of analysts’ estimates compiled by Bloomberg. Suri said he expects market conditions to improve further in the second half, particularly in the fourth quarter, Espoo-based Nokia’s seasonally strongest period, as 5G accelerates significantly.
“There needs to be very strong hockey-stick shaped acceleration in the second half to meet the full-year networks guidance,” Mikael Rautanen, an analyst at Inderes, said on a webcast. “But Nokia must be very confident of this improvement in the latter half as 5G projects progress, as they wouldn’t have given such guidance and outlook otherwise.”
Verizon Communications, the largest US operator by number of subscribers, is currently preparing to start 5G in some markets by the end of the year. The carrier, which recently appointed Ericsson’s former CEO Hans Vestberg to the top job, said this week capital spending would be at the lower end of its forecast range, despite investment in the new technology.
Nokia’s first six months of 2018 contrasts sharply with those of its fierce rival on the other side of the Baltic Sea. Ericsson’s shares have advanced 32% this year as Ekholm’s efforts to reposition the company are starting to bear fruit, and the Swedish company’s network sales grew for the first time in years in the second quarter.
Profitability in Nokia’s core networks business declined in the quarter, due to the price pressure as well as more sales of lower-margin services and products. Suri said Nokia’s deal win rate is “very good”, with “significant” recent successes in the US and China, key early 5G markets.
“Our view about the acceleration of 5G has not changed and we continue to believe that Nokia is well positioned for the coming technology cycle given the strength of our end-to-end portfolio,” Suri said. — Reported by Niclas Rolander, with assistance from Kati Pohjanpalo, (c) 2018 Bloomberg LP