Nokia revises financial guidance amid 'challenging' networks market

Nokia has updated its guidance for 2017 and 2018, citing a more challenging market across networks as well as restructuring costs and its refocus on digital health and patents.
Written by Corinne Reichert, Contributor

Networking giant Nokia has updated its financial guidance for 2017 and 2018 due to a market that it labelled as "slightly more challenging than earlier anticipated" across its Networks division.

Nokia is now expecting a 4 to 5 percent decline in its primary addressable market for 2017 for its Networks business, updated from the previously suggested 3 to 5 percent decline; and a newly announced 2 to 5 percent decline in its primary addressable market for 2018.

"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," Nokia CEO Rajeev Suri explained.

There is "uncertainty related to the timing of completions and acceptances of certain projects, particularly in the second half of 2017 and first half of 2018", Nokia said, along with "uncertainty related to potential mergers or acquisitions by our customers".

"The level of R&D investment needed to maintain product competitiveness and accelerate 5G" was also listed as one of the reasons for the revision.

During Q3, Nokia's Networks business spent €918 million on research and development, an increase of 2 percent from the previous year. Of this, €581 million was spent on Ultra Broadband Networks R&D; €20 million on Global Services R&D; and €316 million on IP Networks and Applications R&D.

Nokia's Group Common segment spent €59 million on R&D.

According to Suri, additional investment is required to "maintain product leadership".

"In terms of the issues we are facing in Mobile Networks, I have noted in previous quarters that the R&D team in this business group has faced an extraordinarily high workload. Given this situation, we have seen some issues with the time taken to converge some products that have, unfortunately, impacted a small number of customers," Suri said.

"As a result, Mobile Networks has experienced both revenue pressure and an increase in expected network equipment swap costs."

The timing of major network deployments and the execution of its cost-savings and reinvestment plans were also referenced in revising Nokia's Networks forecasts.

Nokia updated its overall company restructuring and associated charges from €1.7 billion up to €1.9 billion in costs and its restructuring and associated cash outflows from €2.15 billion to €2.25 billion, with Suri noting that Nokia remains committed to its €1.2 billion cost-savings plan for 2018.

Its network equipment swaps are now expected to cost €1.4 billion in total, up from the €900 million previously stated; the non-IFRS tax rate was downgraded from between 25 and 30 percent down to 20 percent for full-year 2017; and a €100 million increase in overall capital expenditure for the full year, to €600 million in total, is now expected.

Suri 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."

Field deployments of its AirScale system are "ramping up" across the globe, Suri said, with Nokia also adding over 60 customers in "adjacent segments" during the nine months to September 30 including China Pacific Insurance Company, as well as United States cable operator Wow.

The company declined to provide a forecast for its Nokia Technologies business, citing a pivot in its focus from digital media to digital health.

"Due to risks and uncertainties in determining the timing and value of significant licensing agreements, Nokia believes it is not appropriate to provide an annual outlook for full-year 2017," the networking giant explained.

"In the third-quarter 2017, Nokia announced plans to focus on patent, brand, and technology licensing and target faster growth in digital health and accelerate growth in that market, while optimising investments in virtual reality.

"Due to a reduced focus on digital media, Nokia no longer believes it is appropriate to provide an annual outlook for digital health and digital media for the full-year 2017."

For the nine months to September 30, Nokia announced a €1.058 billion loss, which was a 33 percent improvement over the €1.57 billion loss reported for the same period a year ago.

Net sales fell by 3 percent year on year down to €16.5 billion during the nine months to September 30, with Networks down 7 percent to bring in €14.7 billion. Of this, €6.5 billion was from Ultra Broadband Networks, €4.2 billion from Global Services, and €4 billion from IP Networks and Applications.

Nokia's Ultra Broadband Business saw quarterly net sales across Mobile Networks fall by 17 percent year on year, down to €1.6 billion, while Fixed Networks fell by 16 percent to €501 million.

During the third quarter, North America contributed the most in net sales for its Networks business, at €1.4 billion, followed by Europe, at €1.042 billion; Asia Pacific, at €1.003 billion; Greater China, at €630 million; the Middle East and Africa, at €478 million; and Latin America, at €304 million.

Asia-Pacific was the only region in which Nokia's Mobile Networks reported growth, and North America the only region where Fixed Networks grew.

"Ultra Broadband Networks continued to be adversely affected by weakness in the communication service provider market," Nokia said.

"The decrease in Mobile Networks net sales was primarily due to radio networks, reflecting challenges related to market conditions and certain projects. For radio networks, the decrease was primarily related to North America and Greater China, partially offset by growth in Asia-Pacific."

Nokia Technologies, meanwhile, contributed €1.1 billion in net sales for the nine-month period, up 48 percent, with the segment spending €58 million on R&D during the September quarter.

Suri called Nokia's patent licensing business "the clear highlight of the quarter", referring to a favourable arbitration outcome with LG last month in the International Court of Arbitration of the International Chamber of Commerce, wherein Nokia was permitted to continue its licensing strategy.

"We reached a favorable arbitration outcome with LG and have since reached agreement with them on a licence for a longer term than what was set out in the arbitration," Suri said.

"With this fast and effective execution against our patent licensing strategy, we have approximately doubled our recurring licensing revenue from €578 million in 2014."

Suri added that growth in its patent licensing business would offset the sales decline in Networks.

Nokia had announced earlier this month that it would be axing hundreds of employees across its UK, US, and Finnish businesses as part of its refocus on patents, digital healthcare, and VR.

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