(Bloomberg Opinion) -- Nokia Oyj started as a single paper mill in 1865. In recent years, it’s the stock that has been through the mill, as the maker of telecommunications equipment has ebbed and soared with each burst of spending on next generation mobile networks.
Chief Executive Officer Rajeev Suri has steadily toiled away to drag the Espoo, Finland-based company through to the next leg of growth promised by 5G. The fruits of that labor appear finally to be paying off.
It’s early days, but adjusted operating profit hit 451 million euros ($502 million) in the three months through June, exceeding analysts’ 303-million-euro average estimate. The shares jumped as much as 9%.
At the start of the year, the situation looked tough. Nokia posted an operating loss of 59 million euros, when analysts had predicted a 283-million-euro profit. Suri stuck by his 2019 targets, though plenty thought him brave to do so.
But the scale of the outperformance in the second quarter shows we maybe should have taken him at his word. He predicted a soft first half with a “particularly weak” first quarter, and it was just that. He continues to predict a “soft” third quarter followed by an acceleration on 5G spending towards the end of the year. Suri has communicated clearly and kept his promises, unlike Nordic competitor Ericsson AB, as I wrote last week.
The first half of the year has been characterized by carriers spending to build their underlying fixed networks. These can ferry vast gobs of data through fiber optic cables for 5G antenna to then chuck across radiowaves to end devices. Spending on the radio equipment will likely pick up towards the end of the year, driven by the U.S., South Korea and Japan.
The surprising second-quarter numbers mean that Nokia can actually afford to perform slightly worse than analysts currently expect in the second half of the year and still meet its full-year goals of a 9% to 12% operating margin, earnings per share of 25 euro cents to 29 euro cents, and “slightly positive” recurring free cash flow.
Of course there are risks. While Nokia is well positioned to capitalize on Chinese rival Huawei Technologies Co.’s ostracization by the U.S., it’s also losing business from Chinese carriers who are preferring their domestic suppliers. Sales in Greater China fell 5% in the first half.
The Finnish firm is meanwhile working to shift manufacturing capacity out of China to avoid tariffs on goods made there. But given that China was always likely to start sourcing more from domestic suppliers, irrespective of U.S. pressure, the opportunity presented by Huawei’s troubles seems greater than the risks.
Nokia is not out of the woods yet. It still needs a blockbuster second half to meet its goals, and the fourth quarter will be crucial. But with good visibility on 5G orders, and a year-to-date that has followed the trajectory Suri predicted, there’s every reason to believe he can hit them.
To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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