Nokia hit by weak wireless market, says awaiting merger benefits

October 27, 2016 1:25 AM EDT

A photo illustration of a man silhouetted against a Nokia logo in the central Bosnian town of Zenica January 23, 2014. REUTERS/Dado Ruvic/File Photo


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By Jussi Rosendahl and Tuomas Forsell

HELSINKI (Reuters) - Finnish telecoms equipment group Nokia reported a sharp drop in third-quarter earnings on Thursday, suffering from weaker sales in the wireless network market and warning that the market was likely to shrink further in the coming year.

Its share price fell 7 percent on the news to its lowest level in three years, despite analysts saying that Nokia is now better placed than Ericsson to ride out the downturn in the mobile network market following its acquisition in January of broader-based rival Alcatel-Lucent.

Ericsson earlier this month reported a more than 90 percent plunge in third-quarter profits and replaced its chief executive.

The wireless network market is in decline after demand for 4G mobile broadband equipment peaked last year and a new cycle of network upgrades to the still evolving 5G standard is not expected to begin until around 2020.

So far Nokia is seeing scant benefit from the purchase of Alcatel-Lucent, bought in a 15.6 billion-euro ($17 billion) all-share deal, though the company said its integration was proceeding to plan.

Nokia's third-quarter network sales fell 12 percent from a year ago to 5.32 billion euros against an average expectation of 5.39 billion, with revenue declining in all geographic regions.

"It's a bit better than Ericsson's, but it is not a good report ... In the near term, Nokia will have tough time ahead," said Swedbank analyst Mathias Lundberg, who rates the stock "neutral".

"But given time, and with a successful integration of Alcatel Lucent, Nokia could be a very forceful company."

Nokia said its network sales were set to decline at a similar rate in the fourth quarter as in the third, and the market would continue to shrink next year.

"We expect (market) conditions to stabilize somewhat in 2017, with the primary addressable market in which Nokia competes likely to decline in the low single digits (by percentage) for that year," Chief Executive Rajeev Suri told a conference call.

However, Nokia is less dependent than Ericsson on mobile broadband demand, as the Alcatel-Lucent merger gave it a larger fixed-line networks business.

"All in all, Nokia is in a good shape and well prepared for this weak market, unlike Ericsson, which now must reactively adjust its cost structure," said Mikael Rautanen, analyst at Inderes Equity Research who has a "reduce" investment rating on Ericsson.

Nokia, which is cutting thousands of jobs worldwide, said it was on track with its Alcatel synergy program which is aiming to produce annualized savings of 1.2 billion euros in 2018.

"Challenging networks markets are nothing new to Nokia and I believe we remain well positioned ... with our disciplined operating model, focus on efficiencies and costs and our broad portfolio," Suri said.

Nokia's total third-quarter operating profit fell 18 percent to 556 million euros, but that figure was buoyed by a one-off patent licensing payment.

CHANGE OF CFO

The company also announced on Thursday the resignation of Chief Financial Officer Timo Ihamuotila, who is leaving at the end of the year to join Swiss engineering group ABB after seven years in the job. He will be replaced by Kristian Pullola, currently senior vice president, corporate controller.

Once known for its mobile phones, Nokia sold the handset business to Microsoft (NASDAQ: MSFT) in 2014, leaving it with the networks business and a portfolio of technology patents.

Microsoft has largely abandoned the business it acquired since then, while in May Nokia signed a licensing agreement to bring Nokia-branded smartphones back to the market.

($1 = 0.9175 euros)

(The story was refiled to correct a typographical error in the first paragraph)

(Editing by David Holmes, Greg Mahlich)



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