Nokia today said it expects operating margins at its mobile networks business will be flat in 2021  in an update on strategy to streamline the Finland headquartered company into four business groups.

The immediate focus of the mobile networks business will be on executing its turnaround, Nokia said. It expects the business to deliver a comparable operating margin of about 0% in 2021 and significant improvement over the longer term, Nokia added.

Nokia announced a new strategy in October under which the company will have four business groups and CEO Pekka Lundmark said Nokia would “do whatever it takes” to take the lead in 5G.

Pekka Lundmark   Photographer: Roni Rekomaa/Bloomberg

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“We are putting in a significant technology investment in this new strategy switch… we are willing to sacrifice short-term profitability, to make sure that we really get into technology leadership,” Lundmark said in a video interview.

“We are now putting so much money in R&D that we are sacrificing a little bit of the short-term profitability to get to where we want to be in the long term. Still, we are only taking contracts that make commercial sense.”

“We have to remember that 5G is going to be a 10-year cycle and we are still in the very early stages of that cycle.”

The company had earlier cut its 2020 operating margin forecast to 9% from 9.5% and for 2021 forecast operating margin of 7-10% for the entire company. Operating margins at its Network Infrastructure business, which includes optical and fixed networks, would be in the high single digit range in 2021.

Lundmark, who took over as CEO in August, is driving a reorganization at the telecommunications gear maker as the roll out of 5G networks gathers speed. The company said its overall outlook for next year is unchanged and it expects a margin, excluding some items such as restructuring costs, for the entire business of 7% to 10% in 2021.

The break-even margin implies that the “Mobile Networks’ present status seems worse than feared,” analyst Daniel Djurberg at Svenska Handelsbanken AB wrote, even as Nokia seeks “a significant improvement over the longer term” for the unit. Djurberg said he had expected a low single-digit margin.

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Lundmark took over the top job in Nokia in August after product missteps by the company saw it lag Swedish rival Ericsson and Chinese group Huawei in the race to win deals to sell 5G network equipment.

Several senior executives have also left company as it is moving to a new operating model to be implemented on January 1st.

Lundmark said Nokia will now have 11 members in the new leadership team from 17 earlier and there were still two unannounced names who will leave the company.

Nokia has been losing out on contracts for carriers’ 5G build outs, including a big contract to provide 5G technology to Verizon earlier this year which was won by Samsung Electronics Co.

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References:

Nokia sees flat margins at 5G networks business in 2021 | Reuters

Nokia (NOK1V.FH) to Sacrifice Network Margins for 5G Growth in New Strategy – Bloomberg

In a just released 5G Readiness report commissioned by Nokia, market research firm Sapio surveyed 1,628 technology purchasing decision-makers in eight markets and across six industry sectors to get a broad sense of how professionals believe 5G is going to affect their business.

• The markets (and participants) surveyed were as follows: Australia (203), Finland (200), Germany (203), Japan (203), Saudi Arabia (202), South Korea (200), UK (207), US (210).
• The sectors were: energy and utilities (208 responses), mining (119), manufacturing (455), public sector (271), healthcare (445), transportation (130). Respondents from companies of less than 250 employees were only permitted for energy and utilities and mining companies.

The grand summary of this extensive survey and extrapolating exercise is that Nokia now forecasts 5G will add $8 trillion to global GDP by 2030.  A key message is that a lot of technological progress over the next decade will depend on 5G.  That remains to be seen, especially in light of the lack of standards for the non radio aspects of 5G and the ultimate number of 5G Radio Interface Technologies to be included in the 2nd version of IMT 2020.SPECS, sometime in 2021.

On average, whilst the importance of 5G adoption is well understood, a significant investment gap remains. 86% of decision makers said they have some kind of strategy for 5G, and over a third fear being outpaced by the competition should they not invest in 5G in the next 3 years. However, only 15% are currently investing in its implementation, and over a quarter (29%) of businesses are not planning any 5G investment in the next 5 years.

Image Credit:  Nokia

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The report breaks down the findings by country and also looks at specific events like the COVID-19 pandemic. How literally to take all these extrapolations from a company with a vested interest in driving the market is down to the individual, but at the very least it provides a good snapshot of industry expectations.  Here are a few survey results:

• 43% of global technology decision makers have increased their overall investment in their strategic technology planning. This represents a 27% net increase in the number of budgets that have increased.
• In the U.S., additional costs (44%), disrupted timelines (42%) and the emergence of new technology gaps (38%) have been the most prevalent impacts of COVID-19 on technology road maps.
• 41% have C-Level sponsor for 5G implementation in their organization.  25% don’t have any 5G championing from management (23%).
• Businesses are more likely to feel that their industry is middling in terms of 5G adoption, with 20% setting a high benchmark.
• 43% of technology decision makers have a long term 5G strategy. Just over 1 in 10 have no strategy whatsoever (11%)
• Over a third fear being outpaced by the competition should they not invest in 5G, while 27% feel whatever their 5G investment they will still be successful.

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                                                                             5G Investment Plans (SOURCE: Nokia):

Barriers to 5G adoption:

The gap between enterprise awareness of 5G’s benefits and current levels of adoption suggests there are notable barriers to implementation. The research identified five principal barriers to 5G adoption for:

• Ecosystem availability: Limited availability of key infrastructure outside urban centers was cited by 28% of decision-makers.
• Education and understanding: 17% said a key barrier is that decision-makers within their business do not understand 5G, while 14% said they don’t know enough about it themselves.
• Awareness: Over a fifth of technology buyers (22%) said that 5G implementation is not a current priority for their business.
• Cost and complexity: 15% said they were not confident their company would be able to implement the necessary technologies.
• Security: Over a third (34%) said that they are concerned about the security of 5G.

Quotes:

“As organizations across the world move faster towards deployment of 5G enabled technologies, those who wish to be the first to leverage its potential cannot afford to lose more time,” said Gabriela Styf Sjöman, Chief Strategy Officer at Nokia. “To capture the tremendous opportunities of 5G, organizations must start or intensify their planning now and accelerate business model innovation to remain competitive in a rapidly digitalizing global economy. Beyond investment in the technology itself, this will require digitalizing operations, processes and ways of working to capture the full potential of 5G.

“5G adoption is categorically shown to fuel business success. Organizations that have integrated 5G stand to benefit from advantages that go way beyond faster, more efficient and reliable network services. As 5G enables businesses to transform, it will also accelerate wider technological and economic trends, with unimaginable possibilities for global economies and societies.

“The cities, hospitals and factories of the future depend on 5G and the unparalleled ability it offers to move, process and store vast volumes of data. Moreover, the biggest challenges we face as a society – from climate change to the pandemic – can be better tackled through at-scale use of the data and technologies that 5G will unleash.”

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5G Catalysts:

The report identifies three key catalysts for change in order to bring about improved understanding, confidence and ultimately adoption of 5G. These are: improved regulation, collaboration and willingness to innovate.

1. A third of technology buyers said that government investment in infrastructure or subsidies to drive down costs would encourage them to invest more in 5G. Enterprises will not adopt 5G unless the supply from network operators is presented and priced appropriately, which in turn relies on governments and regulators making 5G spectrum in low, mid and high bands available and affordable.
2. The lack of understanding that exists within some businesses around 5G must be directly addressed. Companies and consumers alike need more information about the technology and how it can both improve operations and solve real world problems, ranging from enterprise use cases to telehealth to green technology.
3. As companies better understand 5G, they must boldly move to overhaul their operations to accommodate it, for example, exploring how they could use 5G to streamline and more effectively monitor their mobile workforce, fleet or supply chain.

References:

https://www.globenewswire.com/news-release/2020/10/11/2106580/0/en/Nokia-5G-set-to-add-8trn-to-global-GDP-by-2030.html

https://www.nokia.com/networks/5g/readiness-report/

https://www.nokia.com/networks/5g/readiness-report/about-this-report/

https://onestore.nokia.com/asset/210070?_ga=2.168806049.1042908821.1602549124-1767387886.1601396220

Nokia reckons 5G is the future

Nokia report says 5G could add $8 trillion to global GDP by 2030

We’ve strongly warned for some time that making money in 5G will be extremely difficult until the core IMT 2020 standards (radio and non radio aspects) are complete and widely implemented. Today we heard proof of that from Nokia:

“Some of the risks that we flagged previously related to the initial phase of 5G are now materializing,” Nokia CEO Rajeev Suri said, noting that its third-quarter gross margin was impacted by the “high cost level associated with our first generation 5G products.”

“Competitive intensity has increased in some accounts as some competitors seek to take share in the early stage of 5G,” Nokia said in a statement.  Yet the company said it has 48 commercial 5G deals and has launched 15 live (pre-standard) 5G networks.  It’s telco customers include Sprint, Verizon, AT&T, and T-Mobile in the U.S.

China has been a disappointment for Nokia, too. Greater China made up 8% of Nokia’s net sales in the third quarter, the company said Thursday. But revenue from the region fell by 21% from the year-earlier period.

Nokia shares had one of their worst days ever on Thursday after the Finnish telecom equipment maker reduced its profit outlook to reflect the costs of developing 5G products.  The stock fell by -24% to $3.87 — the largest drop since 1991 — as Nokia also disclosed in its third-quarter earnings release that it would not be paying a dividend for that quarter and the fourth quarter in part to “guarantee Nokia’s ability to increase 5G investments.”

The elimination of Nokia’s dividend contradicted what the company said about dividends on its website to attract investors:

The dividend is the principal method of distributing earnings to shareholders. Over the long term, Nokia targets to deliver an earnings-based growing dividend by distributing approximately 40% to 70% of non-IFRS diluted EPS, taking into account Nokia’s cash position and expected cash flow generation.

Instead of paying a dividend, the company wants to use its cash to increase its 5G investments, strengthen its cash position, and invest in strategic areas such as software. The company expects to start paying dividends again after it reaches a cash balance of 2 billion euros.

Nokia reduced its earnings forecast this year from an operating margin of 9-12 per cent to one of 8.5 per cent, plus or minus one percentage point. For next year, it slashed its estimate of a 12-16 per cent operating margin to 9.5 per cent, plus or minus one percentage point.

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It will take much longer than most pundits believe to realize to monetize the potential and make a decent profit from 5G!

AJW Comment: We are at the start of the 5G transition and Nokia appears to be having the usual problems of refining and finding cost efficiencies in its technology in its first iterations. Gross margins were hit by “a high cost level associated with our first generation 5G products” combined with “pricing pressure in early 5G deals” as it has been limited in what it can charge for the next-generation equipment by competition for those key first customer wins. There are also “profitability challenges in China,” where there has been patriotic domestic buying and support of Huawei 5G equipment by the three state owned telcos. Also, the proposed (but not consummated) merger of Sprint and T-Mobile in the U.S. is causing uncertainty on future demand in one of Nokia’s main early markets for 5G where the company largely competes only with Ericsson (as Huawei has been shout out of the U.S. telecom equipment market, except for earlier sales to rural wireless carriers).

Nokia is the world’s second-largest telecom gear maker by market share, but way behind #1 Huawei.  Ericsson is #3 (see Positive Note below).

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From Nokia’s 3rdQ-2019 earnings statement:

The overall decrease in Nokia gross profit in the first nine months of 2019 was primarily due to lower gross margin in Networks. We experienced relatively high 5G product costs in Networks, as well as elevated levels of deployment services, consistent with being in the initial phase of 5G. This was partially offset by lower costs related to network equipment swaps, net sales growth in both Networks and Nokia Software, as well as higher gross margin in Nokia Software. In the first nine months of 2019, Nokia gross profit benefited from lower incentive accruals.

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From the company’s 3rdQ-2019 slide presentation:

Key drivers of Nokia’s outlook-

Net sales and operating margin for Networks and Nokia Software are expected to be influenced by factors including:
• Our expectation that we will perform approximately in-line with our primary addressable market in full year 2019 and full year 2020, as we further prioritize profitability and cash, while continuing to drive growth in our Nokia Software and Nokia Enterprise businesses. (This is an update to earlier commentary to outperform our primary addressable market in full year 2019 and over the longer-term.) On a constant currency basis, we expect our primary addressable market to grow slightly in full year 2019, and for growth to continue in full year 2020;
• Competitive intensity has increased in some accounts as some competitors seek to take share in the early stage of 5G, which is particularly impacting Mobile Access. (This is an update to earlier commentary that competitive intensity could increase);
• Additional 5G investments focused on accelerating our product road maps and cost competitiveness. Investment areas include System on Chip based 5G hardware, including diversifying and strengthening the related supplier base (new commentary);
• Additional digitalization investments focused on driving automation and productivity, including further simplification of IT tools and operational processes (new commentary);
• Temporary capital expenditure constraints in North America related to customer merger activity, as well as other potential mergers or acquisitions by our customers (This is an update to earlier commentary for potential mergers or acquisitions by our customers);
• The timing of completions and acceptances of certain projects, particularly related to 5G. Based on the evolving readiness of the 5G ecosystem and the staggered nature of 5G rollouts in lead countries, we expect full year 2019 will have seasonality characterized by a particularly weak first quarter, a strong second quarter, a solid third quarter and an expected strong fourth quarter (This is an update to earlier commentary for an expected soft third quarter and an expected particularly strong fourth quarter);
• Some customers are reassessing their vendors in light of security concerns, creating near-term pressure to invest in order to secure long-term benefits;
• Our expectation that we will improve our R&D productivity and reduce support function costs through the successful execution of our cost savings program;
• Our product and regional mix, including the impact of the high cost level associated with our first generation 5G products (This is an update to our earlier commentary, providing additional details); and
• Macroeconomic, industry and competitive dynamics.

On a positive note:  “As I look to the future, it is clear to me that Nokia has some unique advantages,” Suri said, citing “a powerful, end-to-end portfolio that allows us to benefit from 5G investments across all network domains.”

Nokia’s dismal earnings report contrasts with that of rival Ericsson which last week beat quarterly earnings expectations and lifted its market forecast for this year and its sales target for 2020. The Swedish firm said demand for (pre-standard) 5G networks was robust: “5G is taking off faster than earlier anticipated,” CEO Börje Ekholm said in an earnings statement. The Swedish telecom equipment company said it had signed 27 commercial 5G contracts.

Other Voices:

Some analysts had thought that Nokia would benefit from the pressure on Huawei. But the disappointing results published Thursday were driven primarily by weakness in the division responsible for rolling out 5G.

“The report was a major disappointment … outlook was cut across the board reflecting the company’s continuing stumbles as the new cycle of network market is starting to take off,” Inderes analyst Mikael Rautanen said in a note to clients.

“This is all very disappointing,” said Lee Simpson, an analyst at Jefferies. “There is something almost embarrassingly irrelevant about the Nokia story now.”

“He has been in the position now for over five years and is still struggling to put in place a sustainable, comprehensive set of results and targets,” sad Neil Campling of Mirabaud Securities.

References:

https://www.nokia.com/system/files/2019-10/nokia_results_2019_q3.pdf

https://www.nokia.com/system/files/2019-10/nokia_slides_2019_q3.pdf