Nokia’s Profit Plunges 32% as 5G Demand Slows, Sending Shares Tumbling
Finnish telecom giant Nokia saw its second-quarter operating profit plummet by 32% due to weak demand for its 5G equipment, sending its shares down by 8% at the market open. The company cited "ongoing market weakness" and a challenging year-over-year comparison period, particularly impacted by a decline in India’s rapid 5G deployment. While Nokia forecasts a stabilization in the industry environment and an acceleration in sales growth in the latter half of the year, the slow recovery has pushed back the company’s net sales assumptions for 2024.
Key Takeaways:
- Nokia’s second-quarter operating profit tumbled 32% to €423 million (€462 million) compared to €619 million in the same period last year.
- Net sales also declined by 18% to €4.47 billion, marking the lowest level since the fourth quarter of 2015.
- The decline was attributed to a challenging year-ago comparison period, heavily impacted by a slowdown in India’s 5G deployment.
- Nokia forecasts a "stabilizing" industry environment and an "acceleration in net sales growth" in the second half of 2024, despite the slower-than-expected recovery in net sales.
- The company remains on track to achieve its full-year outlook, supported by cost-cutting measures.
- Despite the decline, Nokia continues to target a performance towards or just under the mid-point of its comparable operating profit guidance of €2.3 billion to €2.9 billion for the full year.
A Challenging Landscape for 5G
The decline in Nokia’s profits reflects a broader trend in the telecom industry. Mobile operators are increasingly cautious about their spending on infrastructure, leading to a slowdown in 5G equipment demand.
Nokia’s CEO, Pekka Lundmark, acknowledged the challenging landscape, stating, "The landscape likewise remains "challenging as operators continue to be cautious" in the mobile networks sector."
This cautious approach from operators can be attributed to several factors:
- The global economic slowdown: The ongoing economic uncertainty has led to budget constraints for many businesses, including telecom operators.
- Competition: The telecom industry is increasingly competitive, with multiple players vying for market share. This can lead to price pressure and make it difficult for operators to justify large capital expenditures.
- Focus on efficiency: Operators are increasingly prioritizing cost efficiency and maximizing returns on their existing infrastructure.
The Loss of a Major North American Contract
The challenges facing Nokia are compounded by the loss of a significant contract in late 2023. U.S. telecom giant AT&T chose Ericsson to build a new telecom network using only Open RAN (ORAN) technology, excluding Nokia from the project.
This decision dealt a blow to Nokia, highlighting the increasing adoption of ORAN technology and the competitive pressure from rivals like Ericsson.
Cost-Cutting Measures
In response to the industry challenges and declining financial performance, Nokia has embarked on a series of cost-cutting measures. These measures include:
- Job reductions: Nokia announced plans to eliminate up to 14,000 jobs in October 2023 following a significant drop in third-quarter earnings.
- Cost optimization: The company aims to reduce its gross costs by €800 million to €1.2 billion by 2026.
Nokia has already made significant progress in implementing these cost-saving measures, having reduced costs by €400 million to date.
Looking Ahead: A Stabilizing Industry and the Potential for Growth
Despite the current challenges, Nokia remains optimistic about the future. The company predicts a stabilizing industry environment and an acceleration in sales growth in the second half of 2024. This forecast is based on the company’s recent order intake, which suggests an improving market dynamic.
Nokia’s CEO, Pekka Lundmark, stated, "While the dynamic is improving, the net sales recovery is happening somewhat later than we previously expected, impacting our business group net sales assumptions for 2024. Despite this, we remain solidly on track to achieve our full year outlook supported by our quick action on cost."
The company remains committed to achieving its full-year operating profit guidance of €2.3 billion to €2.9 billion.
The Road Ahead: Navigating a Changing Telecom Landscape
Nokia finds itself at a crossroads. The telecom industry is undergoing a period of rapid change, driven by factors such as:
- The adoption of 5G and beyond: 5G is revolutionizing wireless connectivity, paving the way for new technologies and applications.
- The rise of ORAN: Open RAN is emerging as a more open and flexible alternative to traditional closed-network architectures, challenging established telecom equipment providers.
- The increasing importance of data: The demand for data is growing exponentially, putting pressure on telecom operators to invest in more powerful networks.
Nokia’s ability to adapt to these changes and respond to the evolving needs of its customers will be critical to its future success. The company is focusing on:
- Investing in 5G and next-generation technologies: Nokia is developing and deploying cutting-edge 5G and beyond technologies to meet the growing demands of mobile operators.
- Embracing Open RAN: The company is actively involved in the development and deployment of ORAN solutions, recognizing the increasing adoption of this technology.
- Focusing on software and services: Nokia is expanding its offerings to include software and services, recognizing the increasing importance of these solutions in the telecom industry.
As the telecom industry continues to evolve, Nokia will need to navigate these changes strategically to maintain its market share and achieve long-term growth. The company’s ability to adapt, innovate, and deliver value to its customers will be key to its success in the years to come.
