Thanks to Huawei, Nokia sees a brighter future; profits shoot up

London: Telecom network gear maker Nokia posted better-than-expected 2017 profits on Thursday and said it rebounded from costly prior sales hiccups, encouraging investors spooked by a weakening equipment market and acquisition integration missteps.

Nokia shares bounded 15 per cent higher on results which showed fourth-quarter group operating profit rising 7 per cent to 1.0 billion euros ($1.2 billion), well ahead of a Reuters poll forecast of 888 million euros.

The profits were boosted by a one-off catch-up patent payment of 210 million euros from China’s top smartphone maker, Huawei. Operating profit from the networks business fell 25 per cent year-on-year.

The network industry, dominated by Huawei, Nokia and Sweden’s Ericsson, is weathering the toughest part of a decade-long cycle as demand for 4G gear falls, while spending on new, mass-market 5G networks is unlikely before 2019 or 2020.

“We are coming back very fast,” Chief Executive Rajeev Suri said of the Finnish company’s mobile networks business.

He said the company had moved quickly to fix internal problems it had convincing U.S. carriers to swap out existing Alcatel equipment for comparable Nokia gear - the main reason for its shares losing a quarter of their value since October.

While network sales will remain weak during 2018, a potential rebound of spending by operators in North America could lessen the decline, he said.

“We see some positive signs coming from our North American customers,” Suri told investors on a conference call to discuss the results. “The desire to move fast to 5G is certainly there.”

Nokia generated 30 per cent of fourth-quarter network sales in North America, up slightly over the third quarter, while Asia-Pacific and Greater China declined.

“For 2019 and 2020, we expect market conditions to improve markedly, driven by full-scale rollouts of 5G networks,” Suri told a conference call.

Suri said Nokia’s stepped-up capital spending to win future 5G upgrade deals will weigh on the network unit’s profitability this year. He forecast an operating margin of 6-9 per cent for 2018 before it starts to rebound to around 9-12 per cent in 2020.

“The guidance for this year is slightly disappointing, but the forecast for 2020 is encouraging,” said Mikael Rautanen, an analyst at Inderes Equity Research who has a “buy” rating on the stock.

MARKET SHARE GAINS SEEN

Suri said Nokia is gaining a major share of competitive bids for new business against its major European competitor, rival Ericsson of Sweden, not only in core wireless radio equipment but from a broader portfolio of products and services.

Nokia has refreshed key product lines in the past year to get ready for the next generation of 5G network equipment and he said these upgrades remain 12 to 18 months ahead of rivals.

“I expect we will increase our 5G share relative to what we had in 4G,” Suri said, referring to full-scale rollouts of next generation networks the company sees beginning in 2019.

While Ericsson on Wednesday reported its fifth straight quarter of losses, Nokia has coped better with the downturn, thanks to its 2016 acquisition of Alcatel-Lucent that broadened Nokia’s portfolio.

Ericsson shares fell 9 per cent following its results, but recouped 3 per cent on Thursday, as investors bet on prospects for an eventual 5G-led recovery.