Nokia Slumps After Predicting More Gloom for Network Makers

(Bloomberg) -- The wait for a recovery in the wireless-network equipment business just got longer with Nokia Oyj’s dire third-quarter results.

The Finnish manufacturer predicted a prolonged slump for the industry, sending its shares down as much as 18 percent -- the most since 2012, when it was still struggling with an ailing handset business that was later sold to Microsoft Corp. Now focusing on networks, Nokia faces a tough market as phone carriers are largely done with building their newest systems, and time isn’t ripe yet to start spending on the next-generation, so-called 5G technology.

Nokia lowered its view for the network market’s decline this year and forecast little improvement in 2018, predicting a continued drop of as much as 5 percent. That’s a disappointment for investors expecting an industry rebound after several years of shrinking sales or meager growth.

“These outlook statements are clearly disappointing and push hopes of a recovery out to 2019,” analysts at Natixis said in a note.

Nokia’s warning follows that of struggling Swedish rival Ericsson AB, which last week predicted an 8 percent drop in demand for wireless-network equipment this year.

Industry Shift

Nokia also reported third-quarter sales that trailed analysts’ estimates. Operators are reluctant to upgrade their systems to add data speed and coverage as they wait for a maturing of the 5G technology, which will allow for new types of services such as connected machines and remote-controlled surgery. Those are still a few years away.

“The sector is in the midst of multiple technology transitions,” Chief Executive Officer Rajeev Suri said on a call with reporters. They include the emergence of 5G, a move from hardware to software, and a shift to more powerful routers and switches that enable higher speed and capacity in mobile and fixed networks. “These transitions slow spending and increase uncertainty related to timing,” Suri said.

Shares of Nokia fell 17 percent to 4.25 euros at 4:52 p.m. in Helsinki after dropping as low as 4.19 euros, while Ericsson lost 5.7 percent in Stockholm. ADRs of both companies fell similar amounts in the U.S. The declines wiped out this year’s gains for both stocks.

China Competition

Nokia said the network market is set to shrink 4 percent to 5 percent this year, compared with its previous estimate for a 3 percent to 5 percent decline. The company predicted a drop of 2 percent to 5 percent for 2018. Nokia is locked in a three-way battle for dominance over the market for wireless-network infrastructure with Ericsson and China’s Huawei Technologies Co.

Revenue at Nokia’s network division declined 9 percent last quarter, with the company citing challenges in North America and China. “Robust” competition in China is set to weigh on fourth-quarter results, the company said, as equipment makers jostling for position ahead of the transition to 5G are discounting gear to win customers.

“The cost of gaining, or even maintaining, footprint is significant,” Suri said. “We are working to address the situation with our deal discipline, as we want to ensure the right long-term footprint, but not at any cost.”

Patent Help

In response to the network market slump, Suri is looking for customers in other industries, boosting the company’s software offering and monetizing Nokia’s intellectual property more aggressively. The Espoo, Finland-based company has also been helped by a broadened product portfolio as a result of its 2016 acquisition of France’s Alcatel-Lucent for $18 billion.

Total revenue shrank 7 percent to 5.54 billion euros ($6.55 billion). Analysts had predicted 5.64 billion euros, the average of estimates compiled by Bloomberg. Adjusted earnings more than doubled to 9 cents a share, topping estimates, helped by cost cuts and patent-licensing revenue.

Nokia Technologies, the unit in charge of patent licensing, boosted revenue 37 percent to 483 million euros after the company struck deals with LG Electronics Inc. and Apple Inc. for the use of its intellectual property.

Nokia said it plans to pay a dividend of 19 cents a share for 2017, up from 17 cents for the previous year. Nokia’s net cash position fell 51 percent to 2.73 billion euros in the quarter, with Suri saying he’s “not satisfied” with the company’s performance in that area.

©2017 Bloomberg L.P.