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26 July 2022

Nokia announces first mobile growth for three quarters in solid Q2

Last week, we reported how Ericsson, despite some solid second quarter results, was punished by investors for one particular figure, a fall in gross margin from 43.4% a year earlier to 42.1%. By contrast Nokia, which also reported a fall in gross margin in its Q2 announcement a week later, from 40.9% to 40.2%), received strong positive reaction from the markets, as it returned to growth in its key Mobile Networks business after three successive quarters of decline, and more than two years of upheaval following missteps with the original 5G base station architecture in 2019.

The Mobile Networks business experienced a sales increase of 1% year-on-year, at constant currency, to €2.6bn. The growth was far lower than at the Network Infrastructure unit (fixed, IP and optical, and submarine equipment), which grew by 12% at constant currency, to €2.2bn. But even though the latter business is now almost as large as its mobile stablemate, and lacks a tier one non-Chinese competitor, Nokia is still measured primarily as a mobile business, so the signs of 5G turnaround were essential to market confidence.

Overall in the quarter, Nokia’s net sales rose 11% year-on-year, but 3% at constant currency, to €5.9bn ($2.7bn), while net income rose by 31%, to €460m ($469m).

Nokia has suffered in relation to Ericsson in the first phase of 5G roll-out because of the failings of its first base station chip platform, which led to delays and cancellations of some large contracts. So the revival of the mobile unit, even before most operators are moving to the second phase, or 5G Standalone, is encouraging.

The saving grace for Nokia, during its 5G dark days – which led to the resignation of its previous CEO Rajeev Suri – has been its fixed network business. It often cites private wireless and cloud technologies as its key growth areas, but this was not visible in the Q2 figures.

Those activities live in the Cloud and Network Services (CNS) business unit, which recorded flat revenues year-on-year, on a constant currency basis, at €753m ($767m), and swung to an operating loss of €5m ($5m) from a small profit of €10m ($10m) a year earlier. The main factor behind the lack of growth is likely to be slow market adoption of 5G core, since the mobile core is also in the CNS group.

But the markets reacted mainly to the mobile uptick, and to CEO Pekka Lundmark’s confidence that the second half of the year would be better still, as he expects supply chain disruptions and component shortages to ease. Mobile networks sales have fallen by 2% year-on-year for the first six months of 2022, but Lundmark expects full-year sales to rise 5%.

Nokia has invested less in building up components inventory than Ericsson, and acknowledged it could have done more mobile business with greater availability of supplies, but Lundmark was upbeat about the worst of the shortages being over. Ericsson, by contrast, said its stockpiling had enabled it to fulfil all its contracts, though the policy was one factor in the unpopular decline of its gross margin – along with a fall in patent licensing revenues as it renegotiates some major deals, a problem that also affected Nokia. Nokia Technologies, responsible for licensing, saw its sales fall by 25% at constant currency to €305m ($311m), and operating profits by 35%, to around €217m ($221m).

Overall, rising 5G demand, and a better ability to capitalize on that than in previous years, were key to the new confidence surrounding Nokia. But there are still challenges ahead. Areas of undoubted success for the company, such as private networks, have good growth but remain a small contributor to the sales total. The adoption of the 5G core and 5G Standalone is slow, and this is important to the Finnish firm as a significant architecture change that could enable it to steal customers from Ericsson rather than just hanging onto its own clients or replacing Huawei.

And while it may have judged the supply chain crisis well, it still has to cope with other aspects of the global economic situation, such as higher costs of components coupled with reduced ability of operators to pay high prices. “In all new deals that we make we of course take into account all the new cost information that we have, and we are continuing to book good orders,” said Lundmark on the analyst call. “When it comes to old, existing contracts, there it is significantly harder to go back and change prices that we have earlier agreed. That is something we need to mitigate through improved operational efficiency, through improved productivity.”

He would not comment on whether Nokia could win back some of the business lost at Verizon, and even without significant new RAN sales to that operator, North America delivered 19% sales growth in Q2, at constant currency, and reinforced its position as Nokia’s largest geography, accounting for about 38% of revenues.

But other regions are just gearing up for 5G and Nokia estimates that, outside China, only about 15% of RAN sites have been upgraded to 5G so far. Lundmark said: “What we are hearing from our customers is that their RAN plans for 2023 seem to be pretty strong. And we have to remember there are countries and regions that haven’t even really started on 5G yet – obviously India is one of the most important one here… Latin America is the same thing, it’s only starting now. So that’s why we believe we are still early in the 5G cycle.”