5G Competition Is Proving Costly for Nokia -- WSJ

Date : 10/25/2019 @ 7:02AM
Source : Dow Jones News
Stock : Nokia Corp (NOK)
Quote : 4.33  0.0 (0.00%) @ 10:43AM
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5G Competition Is Proving Costly for Nokia -- WSJ

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By Parmy Olson and Dominic Chopping 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 25, 2019).

Nokia Corp. shares fell more than 20% after it cut profit guidance for this year and next and halted its dividend to cover the growing costs of rolling out equipment for 5G mobile networks.

The telecom-equipment maker blamed shrinking profit margins on weak performance in China, pricing competition from rivals like Huawei Technologies Co. and Ericsson AB and an uncertain outlook amid carrier consolidation in North America. To cope, Nokia said it won't pay dividends in the third and fourth quarters so it can strengthen its cash position and invest more in its 5G product line up. The company said it expects to resume dividend payments after its cash position improves.

"We expect that we will be able to progressively mitigate these issues over the course of next year," Chief Executive Rajeev Suri said.

Nokia is the world's second-largest telecom gear maker by market share, behind Huawei. The industry is in the middle of a race to supply the world's carriers and internet providers with equipment to build out 5G networks. The new networks promise faster connections and the ability to link everything -- from cars, factories and an array of gadgets -- to the internet.

But the rollout has been fitful and hard to forecast. Nokia said early versions of the new equipment are proving costlier than expected to develop and manufacture. Huawei and other Chinese makers have always competed fiercely on prices. Recently, Ericsson, too, has cut prices in a bid to build market share.

Analysts had raised expectations that the two European giants might benefit from a U.S. push to discourage allied governments and their carriers from buying Huawei gear. The U.S. has said Huawei could be compelled by Beijing to use its components and employees to spy on or disrupt foreign networks. Huawei has said it would never do such a thing.

Nokia, in particular, seemed well placed to benefit, with recent inroads in both the U.S. and China, the world's two biggest markets. The pressure on Huawei, though, has pitted Nokia and Ericsson against each other, as they both try and pick up any of its business. The two are competing particularly fiercely in the U.S., where Huawei is all but banned.

Nokia said Thursday that consolidation there has made that market tougher. In July, the U.S. Justice Department approved a $32 billion merger between Sprint Corp. and T-Mobile US Inc.

Ericsson has been pricing its products aggressively around the world, at the expense of its own margins, to boost its market share. Last week, it reported higher earnings and raised its sales targets for 2020 amid what it described as a faster-than-expected changeover to 5G among carriers, particularly in China. Still, Ericsson Chief Executive Borje Ekholm said volumes and price levels were hard to forecast.

China has been a disappointment for Nokia, too. Greater China made up 8% of Nokia's net sales in the third quarter, the company said Thursday. But revenue from the region fell by 21% from the year-earlier period.

Finland-based Nokia also faces headwinds in its home market in Europe. The continent has been a "slower burn" on 5G take up, said Tim Hatt, head of research at GSMA Intelligence, which tracks the industry.

The U.S. pressure against Huawei, meanwhile, hasn't appeared to slow the Chinese giant down. Third-quarter revenue for the equipment and smartphone maker rose 26.7%, to 209.5 billion yuan, ($29.6 billion) according to calculations based on numbers it released last week and previous disclosures.

It has been especially strong in its home market. Of the 52 Chinese cities that have awarded 5G cellular-equipment contracts, 42 selected Huawei, according to a European executive familiar with the Chinese rollout. A recent decision by two of China's three major wireless carriers to jointly build a shared 5G network means that Chinese carriers won't need to buy as much equipment from any manufacturer, further hindering Nokia's prospects for sales in the country.

On Thursday, Nokia reported net profit of EUR82 million ($91 million), up from a loss of EUR79 million in the year-ago quarter. Sales for the period rose a higher-than-expected 4.2%, to EUR5.69 billion.

But a steep erosion in profit margins weighed on the higher revenue. Margins for its network equipment fell to 29.1% from 34.1%, Nokia said.

The company also cut its full-year guidance, and is now expecting 2019 adjusted earnings per share of 21 euro cents, plus or minus 3 cents, down from an earlier range of between 25 and 29 cents. For 2020, it now expects adjusted EPS of 25 cents plus or minus 5 cents, from an earlier range of between 37 and 42 cents.

Sales for the quarter rose 4.2% to EUR5.69 billion, with analysts having expected EUR5.62 billion.

--Stu Woo in Beijing contributed to this article.

Write to Parmy Olson at parmy.olson@wsj.com and Dominic Chopping at dominic.chopping@wsj.com

 

(END) Dow Jones Newswires

October 25, 2019 02:47 ET (06:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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