Nokia looks to 5G growth after weak first half

During the first half of 2018, Nokia reported operating profit of €112 million in Networks, €565 million in Nokia Technologies, and €530 million in group common, after spending over €2 billion on R&D during the period.
Written by Corinne Reichert, Contributor

Nokia has published its financial results for the first half of 2018, revealing operating profit down 37 percent to €573 million on net sales of €10.2 billion, down 7 percent.

The networking giant's Networks operating profit was €112 million for the period, down a staggering 85 percent from €730 million, on net sales of €9 billion. Across this business segment, Nokia made net sales of €3.9 billion from Ultra Broadband Networks, €2.6 billion from Global Services, and €2.5 billion from IP Networks and Applications.

Nokia spent €1.8 billion on Networks research and development (R&D), and made most of its sales in North America, followed by Europe, Asia Pacific, Greater China, Middle East and Africa, and Latin America.

Across its Networks portfolio, Nokia pointed to its 5G deal with T-Mobile, its Internet of Things deal with AT&T, and the launch of its ReefShark chipset and AirFrame Open Edge Server.

According to Nokia, its Networks backlog was "strong" as of the end of Q2, with the company expecting commercial 5G network rollouts to kick off towards the end of this year.

"In its Networks business, Nokia expects improving market conditions in the second half of 2018, with particular acceleration in the fourth quarter in North America," the company said.

"Results in 2018 and over the longer term are expected to be influenced by our ability to scale our supply chain operations to meet increasing demand; recovery actions to address increased price pressure; and the timing of completions and acceptances of certain projects, particularly related to 5G."

Read also: Nokia targets 5G future with new chipsets that boast 3x capacity (TechRepublic)

It also saw double-digit growth year on year in net sales across large enterprises and webscale customers, with CEO Rajeev Suri saying the company had expected such "weak" results for the first half ahead of an "increasingly robust" H2 for 2018.

"Our entry into the enterprise market continued to proceed well in Q2. Year-on-year sales in constant currency increased approximately 30 percent, with strength in both vertical markets and webscale companies," Suri said.

In the Asia-Pacific region, Nokia's Networks net sales fell by 12 percent year on year to €1.8 billion -- €409 million from Ultra Broadband Networks, €271 million in Global Services, and €246 million in IP Networks and Applications.

"Consistent with the global result, we continue to see strong momentum in our Oceania enterprise business and also the development of some very interesting opportunities with our service provider customers as they look to advance their networks, create new service offerings, and generate new efficiencies, particularly in our Nokia Software business unit," Nokia head of Oceania Zoltan Losteiner told ZDNet in a statement.

"There is also some very clear momentum locally around 5G aligned with our aim to improve the Australian and New Zealand customer experience with our end-to-end portfolio and global strategy."

Also set to benefit from 5G is the Nokia Technologies business, Suri said. During the half, the segment brought in operating profit of €565 million, up 63 percent from €346 million, on net sales of €726 million, up 18 percent thanks to licence agreements made in 2017.

"Our view about the acceleration of 5G has not changed, and we continue to believe that Nokia is well-positioned for the coming technology cycle given the strength of our end-to-end portfolio," Suri added.

Nokia spent €121 million on Technologies R&D during the half.

Lastly, Nokia's group common and other segment made net sales of €530 million, down 6 percent from last year's €562 million, and an operating loss of €105 million, an improvement from last year's €161 million loss. Nokia spent €142 million on Other R&D during the six-month period.

Nokia had in October last year updated its financial guidance for 2017 and 2018 due a "slightly more challenging than earlier anticipated" market across its Networks division.

"That decline, which we estimate to be in the range of 2 percent to 5 percent, is the result of the multiple technology transitions underway; robust competition in China; and near-term headwinds from potential operator consolidation in a handful of countries," Suri said at the time.

Also listed as a reason for the revision was "the level of R&D investment needed to maintain product competitiveness and accelerate 5G".

Suri at the time said Nokia is counting on 5G to assist in its strategy of moving beyond communications service providers, as 5G will require end-to-end systems for all service providers.

"As the market transitions to 5G, I believe that the benefits of our portfolio will become even more apparent given that 5G is about much more than radio," the chief executive said.

"It requires cloud core, IP routing, transport of many kinds, fixed-wireless access, software-defined networking, and more, and Nokia is one of the very few companies that is able to meet all those needs."

Nokia's full-year Australian financial results, lodged in May, revealed local sales revenue dropping from AU$856.4 million in FY16 down to AU$536.9 million in FY17.

Despite this, net profit fell only slightly, from AU$22.9 million in 2016 to AU$21.2 million in 2017, while gross profit rose from AU$79.4 million to AU$86.4 million.

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