Nokia Bets on Job Cuts, Fourth-Quarter Boost to Meet Targets

(Bloomberg) -- Nokia Oyj said it will reap the rewards of higher spending on next-generation wireless networks in the final months of 2018, after the Finnish company announced an unspecified number of jobs reductions in a $1 billion drive to cut costs to reach long-term targets.

Thursday’s results showed that the company has some way to go to fulfill Chief Executive Officer Rajeev Suri’s promise of a sharp improvement in the second half of this year. Third-quarter adjusted operating profit missed analysts’ estimates, raising the bar for fourth-quarter performance because the company maintained full-year targets.

While Suri said he was confident the company will deliver the promised windfall in the closing months of the year, he warned that the timing of projects and shortages of certain components could have an adverse impact.

“We are making progress, but still have more work to do to get our networks margins to where we’d like them to be,” Suri said on a call with reporters. “The second half has some heavy lifting to do."

Suri has urged investors to look beyond weak results in the past few quarters, saying that the situation should brighten as carriers, particularly in the U.S., start spending on faster 5G networks. To reach the goals the CEO has set out for 2020, the company is now targeting 700 million euros ($799 million) in annualized savings by the end of that year. The program will cost 900 million euros and will include job cuts, though Nokia didn’t specify how many workers will have to go.

Nokia still sees an operating margin in its network business of 6 percent to 9 percent this year. To reach that target, it will rely on a sharp increase in spending by U.S. operators. In the third quarter, the margin was 5 percent. Quarterly adjusted operating profit of 487 million euros missed the average analyst estimate of 515.8 million euros. Still, the result was an improvement compared with the first two quarters of 2018.

Slight Relief

“The first part of the year was miserable, the third quarter was a little better and the fourth quarter now needs to show considerable improvement,” Inderes analyst Mikael Rautanen said. ”Market expectations were pricing in a profit warning before the report for the networks unit, so there is some slight relief there.”

Nokia shares fell as much as 1.5 percent and were down 0.1 percent at 4.68 euros at 12:37 p.m. in Helsinki.

Nokia and Swedish rival Ericsson AB have both suffered from a slump in investments by mobile-phone carriers that hit in 2016. Since then, Ericsson has set out to slash operating costs and address loss-making businesses, and the first nine months of this year indicate that it’s made some substantial progress. For both companies, the escalating global race to invest in 5G offers an opportunity to grow after years of stagnating sales.

“Our early progress in 5G is extremely strong, we continue to increase our investment in this critical technology, and our win rate for new deals suggests that we are in a very good competitive position,” Suri said in the statement.

Alcatel-Lucent

Nokia in 2016 completed an $18 billion acquisition of French rival Alcatel-Lucent to broaden its product portfolio and offer customers a more complete set of products and services. After the merger, Suri pledged to lower annual operating costs by 1.2 billion euros by reducing overlapping products, services and sales positions.

As part of the plan announced Thursday, Nokia expects to reduce operating expenses by 500 million euros. To reach the 700 million euros it’s targeting in total it sees “significant reductions in central support functions,” and “a sharp reduction of R&D in legacy products,” among other areas.

"The plan we are announcing today is the logical step to take as the completion of our Alcatel-Lucent-related cost saving program draws near,” Suri said. “Even if these actions are right for our business, we do not take them lightly given the expected impact on our employees."

©2018 Bloomberg L.P.