By Jussi Rosendahl and Eric Auchard
HELSINKI (Reuters) – Telecom network gear maker Nokia posted better-than-expected quarterly profits on Thursday and forecast a recovery in profits by 2020, encouraging investors spooked last year by a weakening equipment market and acquisition integration missteps.
Nokia shares rose 9.3 percent on the results which showed fourth-quarter group operating profit increasing 7 percent to 1.0 billion euros ($1.2 billion), well ahead of a Reuters poll forecast of 888 million euros.
The profits were boosted by a one-off catch-up patent payment of 210 million euros from China’s Huawei [HWT.UL]. Operating profit from the networks business fell 25 percent year-on-year.
The network industry, dominated by Huawei, Nokia and Sweden’s Ericsson, is weathering the toughest part of a decade-long cycle as demand for 4G gear falls, while spending on new, mass-market 5G networks is unlikely before 2019 or 2020.
Chief Executive Rajeev Suri said that while Nokia’s network sales would remain weak during 2018, a potential rebound of spending by operators in North America could lessen the decline.
He added that the company’s internal problems convincing U.S. carriers to swap out existing Alcatel equipment for comparable Nokia gear – the main reason for its shares losing a quarter of their value since October – had also eased.
Nokia generated 30 percent of fourth-quarter network sales in North America, up slightly over the third quarter, while Asia-Pacific and Greater China declined.
“For 2019 and 2020, we expect market conditions to improve markedly, driven by full-scale rollouts of 5G networks,” Suri told a conference call.
Suri said Nokia’s stepped-up capital spending to win future 5G upgrade deals will weigh on the network unit’s profitability this year. He forecast an operating margin of 6-9 percent for 2018 before it starts to rebound to around 9-12 percent in 2020.
For the group level, Nokia forecast earnings per share in the range of 0.23-0.27 euros for 2018 – below a market consensus of 0.27 euros – and 0.37-0.42 euros for 2020.
“It’s a bit confusing that they give such precise guidance for long term … there’s no visibility on the market for long-term … Estimates for just one year are difficult, doing it for three years is quite bold,” said Mikael Rautanen, analyst at Inderes Equity Research, with a “buy” rating on the stock.
“The guidance for this year is slightly disappointing, but the forecast for 2020 is encouraging.”
SMARTPHONE PATENTS
While Ericsson earlier this week reported its fifth straight quarter of losses, Nokia has coped better with the downturn, thanks to its 2016 acquisition of Alcatel-Lucent that broadened Nokia’s portfolio.
Analysts noted that ahead of the 5G rebound, Nokia will also be helped by its patent licensing business where it expects sales to grow around 10 percent through 2020.
While about 90 percent of the company’s sales come from network equipment, licensing payments on Nokia patents are highly profitable, and the company has recently struck licensing deals with all the main handset makers.
The mobile phone patent portfolio stems from the time when Nokia was the world’s largest cellphone maker.
CEO Suri said the company was looking to sign new patent deals with other smartphone vendors, but also other companies in automotive and consumer electronics.
Nokia sold the handset business to Microsoft in 2014, but last year brought its name back to the smartphone market with a brand-licensing deal.
The Finnish company is also looking to expand sales to new categories of customers beyond its base of traditional telecom network operators.
Last year, Nokia and Apple signed a patent deal that included business collaboration, including network infrastructure and digital health products.
“Webscale companies (such as Google, Facebook and Amazon), extra large enterprises … and large players in transportation energy, and public sector, make up roughly 5 percent of our sales today, and we are really gaining momentum in this area,” Suri said.
($1 = 0.8059 euros)
(Reporting by Jussi Rosendahl and Eric Auchard; Additional reporting by Tuomas Forsell; Editing by Adrian Croft and Alison Williams)
