Nokia Sees Network Slump's End in Sight, Relieving Investors

(Bloomberg) -- Nokia Oyj said the end of a network slump is in sight, forecasting a pick-up in demand from wireless carriers a year out.

The stock jumped the most in more than two years after Nokia told investors that profit will start to exceed expectations in 2020. That forecast overshadowed a warning that earnings this year will be lower than analysts estimated as Nokia invests in new 5G network technology ahead of expected orders from phone operators.

Nokia Sees Network Slump's End in Sight, Relieving Investors

After the stock lost nearly half its value in the past two years, Chief Executive Officer Rajeev Suri is testing investors’ courage to stick along for another tough year. Nokia and rival Ericsson AB are betting that a slump in network demand will end when carriers start investing in so-called fifth-generation wireless networks that promise faster data speeds and better capacity, enabling everything from cars and traffic lights to refrigerators be more connected.

“We expect 2018 to be challenging,” Suri said on a conference call with reporters. “2018 will be that investment year, and 5G will still be in trials and early pre-commercial rollouts, but the full-scale rollouts will really begin in 2019 and 2020.”

Shares of Nokia rose as much as 8.2 percent for the biggest intraday gain since October 2015, and were up 8.1 percent at 4.19 euros as of 12:21 p.m. in Helsinki. Through Wednesday, they had lost 24 percent since Oct. 26, when the company announced third-quarter sales below expectations and lowered its forecast for the network market in 2017.

Suri said the company now sees 5G network deployments happening at an “accelerated” pace, prompting the company to boost investment in those products. As earnings are expected to benefit down the line, the company pledged to increase its dividend going forward, including in 2018.

“The company is really trying to shift investors’ focus from this year into 2020 when this technology cycle will turn more positive,” Mikael Rautanen, an analyst at Inderes, said by phone. “We should start thinking about the networks business in a longer-term perspective, because obviously, the underlying demand drivers for networks are still out there.”

Nokia and Ericsson have remained under pressure for years as wireless carrier have curbed spending amid stagnant revenue from mobile-phone customers. Nokia has responded by trying to broaden its customer base to other industries as well as boosting its software offering and reducing costs. In the fourth quarter, revenue declined 1 percent, and Nokia expects the market for network equipment to shrink 2 percent to 4 percent this year.

On Wednesday, Sweden’s Ericsson reported a larger-than-expected sales decline for the last three months of the year. The company was less upbeat on 5G than Nokia, saying it doesn’t expect material contribution from the new network technology until after 2019. The two Nordic vendors also face tough competition from China’s Huawei Technologies Co.

Nokia’s forecast for its Technologies unit, in charge of patent licensing, should provide comfort to investors concerned about network demand, Rautanen said. In 2017, Nokia had recurring license revenue of about 1.3 billion euros ($1.6 billion), and said it expects a compound annual growth rate of 10 percent from 2017 to 2020.

“Investors have ignored the earnings growth in Technologies,” Rautanen said. “That will offset the weak margins in the networks business.”

Highlights from Nokia’s fourth-quarter report:

  • Company sees 2018 adjusted EPS of 23 cents to 27 cents; analysts forecast 28 cents
  • Company predicts 2020 adjusted EPS of 37 cents to 42 cents; analysts estimate 37 cents
  • Network division’s operating margin will be 6% to 9% this year, expanding to 9%-12% in 2020, Nokia predicted
  • 4Q net sales of 6.7 billion euros beat the average estimate of 6.44 billion euros
  • 4Q adjusted EPS 13 cents; analysts predicted 11 cents

©2018 Bloomberg L.P.