Shares of Finnish telecom giant Nokia plummeted on Thursday following the company's report of a significant decline in second-quarter operating profit, attributed to weak demand for its 5G equipment. The Helsinki-listed stock dropped 8% by 9 a.m. London time, shortly after the market opened.
Nokia revealed that its comparable operating profit fell by 32% to 423 million euros ($462 million) in the second quarter, a steep decline from the 619 million euros posted in the same period last year. Net sales also decreased by 18% to 4.47 billion euros, marking the lowest level since the fourth quarter of 2015, according to data from LSEG.
"The most significant impact was the challenging year-ago comparison period which saw the peak of India's rapid 5G deployment, with India accounting for three-quarters of the decline," Nokia CEO Pekka Lundmark said in the earnings release. The current landscape remains "challenging as operators continue to be cautious" in the mobile networks sector, he added.
Despite the current hurdles, Nokia forecasts a stabilizing industry environment and anticipates a "significant acceleration in net sales growth in the second half" of the year, based on recent order intakes. "While the dynamic is improving, the net sales recovery is happening somewhat later than we previously expected, impacting our business group net sales assumptions for 2024," Lundmark noted. However, he affirmed that Nokia remains on track to achieve its full-year outlook, supported by swift cost-saving actions.
The company continues to aim for performance toward or just below the mid-point of its comparable operating profit guidance of 2.3 billion to 2.9 billion euros for the full year. Nokia's struggles have been compounded by the loss of a major North American contract late last year when AT&T selected Ericsson over Nokia to build a telecom network using ORAN technology.
Both Nokia and its Swedish rival Ericsson have embarked on extensive cost-cutting programs in response to a slowing economy and reduced infrastructure spending by mobile operators. In October, Nokia announced plans to eliminate up to 14,000 jobs following a significant drop in third-quarter earnings, aiming to reduce gross costs by 800 million to 1.2 billion euros by 2026. The company reported "significant progress" in its cost-saving program on Thursday, having already actioned measures to reduce costs by 400 million euros.
Optimism for Future Sales
Despite the disappointing results, Nokia remains optimistic about the future. CEO Lundmark highlighted an improving fiber market in the U.S. and a $42 billion U.S. government program to enhance access to high-speed broadband as potential growth drivers. "That's creating some interesting additional dynamics right now for us because we are clearly the first mover there with a product portfolio that is compatible with the 'Buy America' requirements," Lundmark told Reuters, adding that the real impact of these initiatives would be felt next year.
In Europe, Nokia and Ericsson could benefit from Chinese vendors losing market share following Germany's decision to exclude companies like Huawei and ZTE from the nation's 5G network products from 2029. Lundmark stated that Nokia is still assessing the impact of this decision.
Market Reactions and Analyst Insights
Analysts expressed concerns over Nokia's performance. Jefferies analysts pointed out that both sales and earnings missed forecasts when one-offs were excluded. Inderes analysts suggested that Nokia's outlook would remain under pressure until the end of the year.
Nokia's net sales in the second quarter were driven down by a slowdown in the pace of 5G technology investment in India, a key market that had seen rapid growth a year earlier. The company's revenue fell 18% year-on-year, reflecting the industry's broader challenges.
Industry Challenges
Nokia and Ericsson have been grappling with reduced spending on telecom equipment by customers, leading to thousands of layoffs in response to the market downturn. Despite these challenges, both companies have maintained their full-year guidance for comparable operating profit.
Nokia's future sales recovery is expected to be driven by increased demand for high-speed broadband and the ongoing shift in market dynamics away from Chinese vendors. The company remains committed to its cost-saving measures and strategic investments to navigate the current market challenges and capitalize on emerging opportunities.
