Shrinking network equipment market hits Nokia

HELSINKI/LONDON (Reuters) - Nokia NOKIA.HE reported a sharp drop in quarterly earnings at its main telecom network gear business on Thursday, warning the market had turned more challenging due to tough competition in China and consolidation among wireless carriers.

Flags with the Nokia logo flutter at company's headquarters in Espoo, Finland, May 5, 2017. REUTERS/Ints Kalnins

Shares in the Finnish company dropped as much as 16 percent after it forecast the market, where it competes with China's Huawei [HWT.UL] and Sweden's Ericsson ERICb.ST, would fall for a third straight year in 2018.

The telecom network equipment industry is going through the toughest part of a decade-long cycle, as demand for 4G and older 2G and 3G network equipment subsides, while demand for next-generation 5G networks remains a few years away.

Ericsson also posted worst than expected results last week and its fourth consecutive quarter in the red due to weaker demand in China.

Huawei overtook Ericsson as the world’s largest maker of mobile network gear last year, thanks in part to the rise of China as the world’s biggest smartphone market, as well as cost efficiencies derived from its vast home market.

The United States restricts the sale of Huawei network equipment due to national security concerns.

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. Analysts’ average forecasts in a Reuters poll were 5.0 billion and 432 million respectively.

Chief Executive Rajeev Suri said consolidation among wireless operators and fewer technology upgrades were hitting 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 ... This is largely a North American issue,” he added.


Sources told Reuters this week that T-Mobile TMUS.O and Sprint S.N, the third- and fourth-largest U.S. wireless carriers, were laying the groundwork for a possible merger.

Bankers and investors expect the deal, if successful, could trigger a new wave of global tie-ups in the telecom industry, which would reduce the pool of potential clients for gear makers.

Nokia estimated the global market would fall 4-5 percent this year, compared with a previous forecast for a 3-5 percent drop, followed by a 2-5 percent fall in 2018.

“Significant new spending will only come when 5G accelerates,” Suri said, adding he believed that would start in 2019.

Ericsson, whose enterprise value is around 11 times forecast earnings compared with 9 at Nokia, said last week it had detected signs of improvement in the market, lifting its shares. But they fell back 5 percent after Nokia’s report.

“This (Nokia’s guidance) was a surprise. Ericsson gave reason to believe that the market was in a better shape. Many people had expected 2018 market growth around zero,” said analyst Hannu Rauhala at OP Equities with a “buy” rating for Nokia.

Nokia's total quarterly profit jumped 20 percent to 668 million euros, above analysts' forecasts due to a one-off payment of 180 million euros from a settled patent dispute with LG Electronics 066570.KS.

Once the world's largest handset maker, Nokia sold its mobile phone business to Microsoft MSFT.O in 2014 and has since focused on networks and patents. Last year, it bought Franco-American rival Alcatel-Lucent in a 15.6 billion euro deal.

Reporting by Jussi Rosendahl, Tuomas Forsell in Helsinki and Sophie Sassard in London; Editing by David Holmes and Mark Potter