Nokia Q3 2019 earnings prompt share plummet, 5G risks ‘materialize’

Share prices suffer as the tech giant slashes its full-year outlook.

Nokia opens its first European 5G lab An extension of the 5G Future X Lab that was built at its Nokia Bell Labs headquarters in New Jersey last year.

Nokia has published its third-quarter earnings for 2019 together with cut full-year outlooks for both 2019 and 2020, leading to share prices falling off a cliff. 

Nokia's Q3 2019 financial report (statement) (.PDF) posted revenues of €5.686 billion, an increase of four percent year-over-year, with diluted earnings per share of €0.01, or €0.05 non-IFRS, a fractional decrease in comparison to Q3 2018.

The technology vendor said the EPS result was "primarily driven by lower gross profit in Networks and a net negative fluctuation in financial income and expenses," which was "partially offset by higher gross profit in Nokia Software and continued progress related to Nokia's cost savings program."

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The technology vendor reported a non-IFRS operating profit of €478 million, a decline of two percent in comparison to Q3 2018's €487 million. Net cash and investments stand at €344 million, together with a reduction of roughly €160 million as the company sought to free up net cash during the quarter.

Nokia's Networks, Software, and Technologies groups posted growth rates of four, nine, and two percent, respectively.  

One of the major announcements investors should take note of is Nokia's plans to pause dividend payments. The third and fourth intended dividend installments for FY 2018 will be stopped in order to improve the company's bottom line and are not expected to resume until Nokia is able to report a net cash position of approximately €2.1 billion. 

Nokia also wants to pause payments to "increase investments in 5G and strategic focus areas." The company is attempting to fend off competitors in the 5G space through cost-cutting, the development of 5G products, and initiatives such as the opening of a lab dedicated to 5G development. 

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The other key takeaway is the firm's decision to slice both 2019 and 2020 outlooks. 

Nokia's 2019 outlook has reduced from €0.25 - 0.29 non-IFRS earnings per share to €0.21, plus or minus €0.03. A Q4 2019 midpoint is estimated to be €0.135. Non-IFRS operating margins are expected to hit 8.5 percent, together with a net cash flow of €1.5 billion by the end of 2019.

FY 2020 is predicted to offer non-IFRS earnings per share of €0.25, plus or minus €0.05, a decrease from €0.37 - €0.42. Nokia's non-IFRS operating margin is predicted to be roughly 9.5 percent.

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Nokia shares plummeted by 24 percent at the time of the Q3 2019 report's release. At the time of writing, the share price has declined by 19.93 percent to €3.78.

"Some of the risks that we flagged previously related to the initial phase of 5G are now materializing," said Rajeev Suri, Nokia President and CEO. "In particular, our Q3 gross margin was impacted by product mix; a high-cost level associated with our first-generation 5G products; profitability challenges in China; pricing pressure in early 5G deals; and uncertainty related to the announced operator merger in North America." 

"We expect that we will be able to progressively mitigate these issues over the course of next year," the executive added. "To do so, we will increase investment in 5G in order to accelerate product roadmaps and product cost reductions, and in the digitalization of internal processes to improve overall productivity."

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