Nokia | The management praises the recent result, but the share fell sharply – three things explain why

Network devices the manufacturer Nokia is reaching its financial goals set for this year.

In its interim report, the company estimates that this year’s net sales will grow closer to the “upper end” of the target of 23.9–25.1 billion euros, and the operating profit percentage, which measures profitability, will be in the mid-range of the estimated 11–13.5.

“We have reached a decent growth track in terms of turnover. Net sales grew by six percent without the effect of exchange rates. This shows that our technology investments are paying off, and easing bottlenecks in supply chains increases our turnover,” says the CEO Pekka Lundmark.

Nokia’s turnover in April–June was 6.2 billion euros and operating profit excluding non-recurring items was 658 million euros. Turnover was higher than analysts’ estimates, but operating profit was lower than expected.

Due to the reduced profitability, the company’s shares fell by almost nine percent to 4.33 euros on Thursday afternoon on the Helsinki Stock Exchange.

Competitive between network equipment companies is harsh. Despite the decline in profitability, Nokia does not pale next to its Swedish competitor Ericsson.

Nokia’s operating profit percentage was 10.5 percent in July–September, which is 1.2 percentage points less than in the same period last year.

Ericsson’s operating profit percentage was 11.3, but weakened by 5.2 percentage points from a year ago. The company’s stock fell 17 percent on Thursday afternoon on the Stockholm Stock Exchange.

Nokian CEO Lundmark considers it an important achievement that the turnover of mobile phone networks increased by 12 percent from the same time last year without the effect of exchange rates.

“The increase in turnover has also improved the profitability of mobile phone networks, as its comparable operating profit percentage increased from 7.3 to 9.8.”

A significant relative strengthening of the US dollar leads to an increase in turnover, when the turnover acquired in dollars is converted into euros in the income statement. Therefore, it is essential to look at the income statement data without the effect of exchange rates.

In addition to the improved profitability of mobile phone networks, CEO Lundmark is pleased with the expansion of the customer base.

Most of Nokia’s customers are telecom operators, but as a result of digitalization, many companies other than telecom operators turn to Nokia.

“Business customers’ turnover increased by 22 percent. In particular, private networks and agreements with large internet companies have accelerated the growth of corporate customer business.”

Out of the four business groups, the turnover and operating profit of the patent-licensing technology unit shrank significantly because the Chinese mobile phone manufacturers Oppo and Vivo have not renewed their contracts with Nokia. Ericsson’s profitability was also weakened by disputes over license fees for patents.

Third the weak point in Nokia’s result was once again cloud and network services. The unit’s turnover shrank by three percent to 801 million euros and operating profit by 48 percent to 16 million euros.

“In cloud and network services, large investments are underway in private wireless networks sold to companies. It is encouraging that while the product range of cloud and online services has been renewed, its gross margin has developed well. Due to the large investments, these reforms will not yet come through to profitability. To succeed in this business, we have to invest a lot and accept that profitability will only improve later.”

Gross margin is calculated by deducting acquisition and manufacturing costs from turnover. It is the simplest way to measure the company’s profitability. Gross margin does not include, for example, research and product development costs or sales and marketing costs.

Of the lights despite the outlook, one major risk for Nokia’s industry is a slowdown in global economic growth. Telecom operators usually reduce their investments when the economy weakens.

“We follow the development of the economy very closely and our industry is by no means immune to the deterioration of the economic cycle. Some telecom operators have announced that they are cutting investments, but based on all the information we have available, the market is still growing and we will increase our market share next year as well.”

CEO Lundmark is also satisfied with Nokia’s success in India. Ericsson and Nokia announced on Monday that they have signed significant agreements with India’s largest telecom operator, Reliance Jio.

“Our market share in India on Bharti Airtel’s network is 45 percent. In terms of our market share, it is very important that we announced the agreement with the telecom operator Reliance Jio, which is a new customer for us. The market share of this contract is significant, but it cannot be said yet.”

in China Nokia’s net sales have declined further because Chinese telecom operators prefer domestic network companies. This is because authorities in many countries have ordered telecom operators to avoid using equipment and software from China’s Huawei and ZTE due to suspicions of espionage.

“The market shares available to foreign companies in China have shrunk and will continue to shrink.”

With Ericsson and Nokia both estimating that they will continue to increase their global market share, doesn’t this mean that their Chinese rivals are losing ground?

“Yes. This is true.”