Nokia Soars After Raising Its Guidance More Than Expected

(Bloomberg) -- Nokia Oyj added more than $2 billion to its market value on Thursday after surprising investors with a bigger profit upgrade than expected.

Shares in the Finnish maker of 5G equipment soared as much as 8.7%, making it one of the day’s best performers in the Stoxx Europe 600 index. Chief Executive Officer Pekka Lundmark said Nokia would have unveiled an even more ambitious outlook, had it not been for supply issues caused by the global shortage of semiconductors.

Nokia now sees an operating margin of 4-7% for Mobile Networks this year, compared with earlier guidance that had left room for a loss. Overall sales and profit will also be bigger than previously guided, it said.

“We upgraded our topline guidance by roughly a billion euros, which is great” but “it would have been even more without the component shortages,” Lundmark said in an interview.

The second-quarter results are the latest indication that a turnaround strategy launched before the pandemic is paying off. Nokia had already signaled it was ready to raise its guidance, but the company still managed to exceed analyst expectations.

The company’s ability to secure supply will be key in determining its success as it tries to go from underdog to top performer in the race to deliver next-generation mobile networks. Unlike previous chipset issues to have hit Nokia, however, the current component shortage also affects its competitors.

Daily work with semiconductor suppliers “is only intensifying,” Lundmark said. Nokia’s current guidance takes the supply issue into account, he also said.

“We are able to manage it,” he said. “It requires a lot of attention, the visibility is not what it used to be.”

Key Figures -

• Nokia now expects to reach a comparable operating margin of 10-12% this year with sales in the range of 21.7 billion euros ($25.7 billion) to 22.7 billion euros. It previously forecast a margin of 7-10% and sales of up to 21.8 billion euros.
• Net sales rose to 5.31 billion euros last quarter, more than the average analyst estimate of 5.16 billion euros. Comparable operating profit reached 682 million euros.
• The Mobile Networks unit, Nokia’s biggest, benefited for a one-time software deal worth about 80 million euros, the company said.

Nokia has managed to respond to growing demand without letting costs swell. That’s as a combination of technology fixes, savings and job cuts pays off. The company has also had a little help from outside as geopolitical tensions deliver a blow to its main competitor. The company recently won a 4% slice of China Mobile Ltd.’s 5G tender. Its arch rival Ericsson AB got just 2%, as it absorbs the fallout of Sweden’s decision to ban Huawei Technologies Co. and ZTE Corp.

For Nokia, the Chinese order helps CEO Lundmark move ahead with his turnaround strategy, which includes slashing the workforce by as many as 10,000 people.

Nokia’s recovery path started in late 2019, when then-CEO Rajeev Suri halted dividends and instead reinvested the money in research and development. That’s after the company was forced to acknowledge its 5G offering was inferior and more expensive to make than rivals’ products.

“We’re now seeing the fruits of all the labor to improve 5G products that started about six months before Suri stepped down as CEO,” Kimmo Stenvall, an analyst at OP Group in Helsinki, said by phone before Thursday’s report. “The impact of Lundmark’s turnaround is probably pretty small still at this stage, given it started so recently. The benefits will eventually be seen in higher revenue and an improved gross margin.”

Nokia’s stock has now risen almost 70% since the start of the year and several analysts have upgraded the shares. Ericsson is up less than 2% over the same period.

“The turnaround story has gripped the Nokia stock in recent months,” Stenvall said. “It seems people are ignoring weaknesses, and trust that the new management is able to push through changes.”

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• See the second-quarter numbers here.

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