5G starts to whittle away at Nokia’s losses with upbeat Q2

Like Ericsson a week earlier, Nokia reported second quarter results which were cautiously optimistic though not exciting. It increased revenue and reduced losses as the first phase of 5G business gathers pace, though its challenge, as for Ericsson and Huawei, will be to keep that new source of revenue flowing smoothly, by creating the right conditions for operators to gain confidence and start to implement ‘true 5G’, awarding the high value deals for cloud-native cores and densified RANs (see special report).

Nokia’s net sales for the quarter were up 5% year-on-year to €5.7bn ($6.3bn). Its net loss of €191m ($213m) was better than a year-ago loss of €271m ($302m).

The biggest division, Networks, reported revenue of €4.39bn ($4.9bn), up 8% year-on-year.

It is currently de rigeur to offer a number of 5G contracts at each quarterly read-out, though the vendors do not give much indication of the scale of these deals. Nokia said it now has 45 commercial 5G contracts, with nine live networks. Ericsson, which also saw its Q2 bolstered by 5G sales, gave its own publicly announced figures of 23 5G contracts, but a higher proportion that have gone live – 15 in total.

In its Q2, Nokia was more upbeat about 5G than in the first quarter of the year, which was dragged down by lower than expected 5G contribution. Then, Nokia executives said 5G roll-out had started a year or so earlier than vendors had predicted until quite recently, but the scale of the first phase deployments was small and many operators are adopting a modernization approach – activating 5G New Radio in existing networks that were already 5G-ready – while all were continuing to use the existing 4G core with 5G in Non-Standalone mode.

Although the first Standalone networks, with full 5G cores, are yet to be seen, some operators are starting to spend money in preparation, sometimes by virtualizing and modernizing their 4G cores to make the transition easier in a couple of years’ time (like BT and Verizon – see special report).

Nokia was also helped because it was able to recognize more 5G revenue – about half of the $222m in net sales related to 5G deliveries that it was unable to include in the Q1 figure, with the rest due to come in soon.

The biggest portion of that is coming from North America, where it is part of the three projects that are currently live, at AT&T, Verizon and T-Mobile USA. Nokia CEO Rajeev Suri said 5G revenue was expected to grow in the second half of this year as the US roll-outs ramp up and other operators join the race.

Net sales in North America were up 13% year-on-year to €1.75bn ($1.95bn), while net sales in Europe generated €1.6bn ($1.7bn), up 4%.

Suri also said that 5G contracts bring sales of other equipment along with them, adding to the total value. Half of the 5G New Radio deals fall into that category, and this is where he claims to score over Ericsson because of a bigger product range.

“Our end-to-end R&D capacity is larger than our European competitor, giving us the resources to catch up where we’re behind and further distance ourselves where we’re already ahead,” he said, adding that Nokia was strong on field performance of its 4G networks, which helped it to win in 5G NSA environments. He boasted that none of Nokia’s 4G customers had yet decided to change vendor for 5G.

However, changes of supplier are more likely to come with Standalone 5G, since it is complicated to swap suppliers in NSA mode – the X2 interface which supports handover between 4G, or 4G and 5G, base stations is not implemented uniformly by all the vendors, making multivendor systems hard when operators need to support Dual Connectivity for both radio standards to the same 4G core. Even Nokia’s CTO, Marcus Weldon, has admitted: “Each vendor tends to implement it slightly differently to get superior performance on their own systems.”

Indeed, Nokia would not talk about any deals where it may have replaced another 4G vendor. “The majority of deals are converting existing customers to 5G and maybe expanding some share,” said CFO Kritian Pullola, agreeing that it was Standalone 5G that would “break the link” between 4G and 5G and possibly increase competition. Some operators are hoping that will be the point at which they can introduce new vendors to their supply chain, perhaps supporting open architectures such as the ORAN Alliance’s.

Nokia saw an 11% decline in fixed network access sales as spending on access equipment declines, and admitted it expects a turnaround in this business to take some time.

Nokia’s operating margin was up from 6.3% to 7.9%, something it attributed to 5G sales growth and strong performance in IP routing and optical equipment. There was also a boost to margins from the small but growing licensing and software businesses, which carry higher profitability than equipment.

But margins may suffer again if the vendors engage in 5G price wars in order to gain market share, something Ericsson has already warned about. It is critical to get a major 5G footprint in the first phases, and operators will be putting heavy pressure on vendors to reduce pricing.

Suri summed up: “In the quarter, we saw good year-on-year growth, meaningful improvements in profitability, robust progress in our strategic expansion areas of software and enterprise and excellent momentum in our IP routing business.”

But while he expects the last quarter to be particularly strong as 5G gathers further steam he acknowledged some significant risks for the rest of the year too, including execution demands, and uncertainty related to trade wars and resulting fears of the Chinese market getting less open to western suppliers.

Pullola said: “As we go through the transition from 4G to 5G, there is more support for local vendors in China. That is something we need to recognize and take into account when we make assessments and look at where to invest and when to back away from some of the competitive situations that hinder us to deliver profitable and longer term growth.”

China accounted for 9% of Nokia’s total revenues in Q2 though sales in Greater China fell by 2% year-on-year, to €515m ($573m). Most business is done through a joint venture with local state-backed firm Huaxin, called Nokia Shanghai Bell, which may put Nokia in a stronger position than Ericsson if tensions with China persist.

“Given these risks, we will continue to focus on tight operational discipline, delivering on our €700m cost savings program, improving working capital management and advancing the implementation of our strategy,” Suri said.

Nokia did upgrade its expectations for its primary addressable market in telecoms networks, which it believes will grow slightly in 2019, with continued growth in 2020. It had previously expected the addressable market to stay flat in 2019 and grow in 2020. It also expects to outperform the primary addressable market in 2019 and longer term.

One area of concern is Nokia’s cash performance, but Suri said the company is confident it can turn that situation around. Net cash was down 77%, to €502m ($559m) because of restructuring costs, dividend payments and other “temporary headwinds”, which Nokia pledged to reverse in the third quarter.