Nokia CEO says carriers face substantial 5G investment needs

The chief executive of Nokia Oyj signaled that a near-term decline in operator demand for 5G gear in a worsening economy will turn out to be a passing phenomenon given a “substantial need” to invest in those networks globally.

Nokia on Thursday reiterated that challenges stemming from a deteriorating economic outlook and customers working through existing inventory intensified in the second quarter and are set to continue in the second half. It had made similar remarks last week when cutting its full-year guidance.

“We are of the opinion that this has to be a question of timing because data traffic continues to grow 20 to 30% per year globally,” Chief Executive Officer Pekka Lundmark said in an interview. “In Mobile Networks there is still substantial need for operators to invest in 5G globally with only approximately 25% of the potential mid-band 5G base stations so far deployed outside China. ”

Nokia on Friday delivered an unscheduled profit warning, downgrading its full-year guidance due to a weakening fifth-generation mobile equipment market. It’s facing macro-economic headwinds as customers continue to work through inventories that had grown during global supply-chain disruptions. Nokia’s move came on the heels of a gloomier outlook from Swedish competitor Ericsson, which similarly had said that its North American business was facing low sales as carriers continue to reduce inventory levels.

Nokia is banking on operators not wanting to fall behind their rivals in expanding 5G coverage.

“There’s strong competition between operators. If one operator slows down for a longer period of time, they will lose competitiveness,” Lundmark said. “We believe that the competitive situation will drive their investments. When exactly they will start accelerating again is very difficult to say at this stage.”

Nokia expects to see second-half net sales “broadly similar” to the first half in both Network Infrastructure and Mobile Networks with some sequential improvement visible into the fourth quarter.

As disclosed in the preliminary release, the company now expects to book sales of €23.2 billion to €24.6 billion ($26 billion to $27.6 billion) this year, less than its forecast had been. It forecasts a comparable operating margin in a range of 11.5% to 13%, with the top end of that range previously seen at 14%.

Nokia had on Friday unveiled second-quarter net sales of about €5.7 billion, flat year-on-year on a constant currency basis, and with a comparable operating margin of 11%. The quarter included a €80 million benefit from catch-up net sales in Nokia Technologies.

The company also reiterated the message that it would continue to take measures to remain on track to meet its long-term targets — growing faster than the market and delivering a comparable operating margin of at least 14%.

“We have €3.7 billion net cash on our balance sheet,” Lundmark said. “We have the financial muscle to navigate through these stormy waters that we are seeing right now.”

Key Figures

• Second-quarter adjusted operating profit €626 million, estimate €758.3 million
• Second-quarter adjusted gross margin 38.8%, estimate 38.9%
• Second-quarter adjusted earnings per share €0.07, estimate €0.08