Nokia only really has two competitors in the telecommunications equipment business, and one of them — China’s Huawei Technologies — has been all but banned from much of the market. At the same time, phone companies are opening their cheque books for a new generation of 5G technology that’s only supplied by Nokia, Huawei and the other big rival, Ericsson.
Pretty ripe conditions for a thriving business? Not for Nokia. The Finnish company on Thursday cut its profit outlook for this year and next, and suspended a dividend payout. Nokia shares fell the most in 19 years. CEO Rajeev Suri urgently needs to stop the bleeding.
With a new burst of infrastructure spending by the big telecoms carriers, mobile networks should be a bright spot for equipment makers. Yet they’re Nokia’s biggest problem. Revenue from this business grew just 4.4% in the three months to September. Sales at Ericsson’s networks arm (which includes more than just mobile products) rose 9% in the same period.
Ericsson’s performance may be flattered by its decision to cut prices to attract new customers, and then look to make bigger profit from long-term service contracts. Nokia is wary of copying this strategy, which has gone wrong for its Swedish rival in the past after the long-term revenue didn’t appear.
But that caution isn’t helping. The gross profit margin at Nokia’s network arm still fell to 29% in the third quarter, down from 34% a year earlier. Suri ascribes that to the higher cost of 5G components. Because adoption of the technology isn’t yet widespread, economies of scale haven’t lowered its expenses. Unfortunately for Suri, Ericsson’s gross margin in the most similar part of its business increased slightly over the same period.
Nordea Bank analyst Sami Sarkamies reckons Nokia simply lags behind Ericsson technologically. That makes Nokia’s equipment more expensive to produce. With the company still having to try to compete with Ericsson on price, this erodes profitability.
Thursday’s share price decline has erased more than €5-billion of Nokia’s market value, leaving it capitalised at €21-billion. That’s big, but not too big to be an acquisition target. American authorities are eager to beef up the 5G capabilities in the US, given China’s relative strength, so maybe a company like Cisco Systems or Qualcomm might be persuaded.
A bid at the shares’ one-year-high, touched in January, would represent a 50% premium over where the stock was trading on Thursday. It’s far from certain that would overcome Finland’s concerns about losing a national champion, but it might at least make it think. Suri needs to find some answers quickly to ensure this remains only market talk. — Reported by Alex Webb, (c) 2019 Bloomberg LP