Nokia cites mobile progress but braces for challenges in 2021

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Nokia’s 4G to 5G conversion rate was about 80%, and around 90% when excluding China.

Nokia reiterated expectations for a challenging year ahead as it works to implement a turnaround focused on its mobile networks. The Finnish vendor reported some bright spots in Q4, though net sales declined overall including its key networks business.

The fourth quarter and year-end results come as CEO Pekka Lundmark is implementing a broad organizational overhaul. That has involved leadership changes and a shift away from an end-to-end strategy, in favor of a focused approach contained within four business groups.  

Net sales were down 5% to EUR 6.56 billion ($7.85 billion) for the fourth quarter versus the year prior,  and decreased 6% to EUR 21.86 billion ($26.16 billion) for the full year 2020. Nokia saw declines in network deployment and planning services that were partially offset by a growth in radio access products driven by 5G, with the latter impacted by lower sales of legacy radio products.

Nokia lost market share in 2020, including a network contract with Verizon that went to Samsung, as well as in China where competitor Ericsson succeeded in picking up 5G deals.

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Still, Nokia cited ongoing progress within its troubled mobile networks unit. There was also success with T-Mobile, who signed a new 5-year contract with Nokia.

Its 5G gross margin increased thanks to reduced product costs, thanks in part to higher volumes of ReefShark shipments.

5G profit margin struggles related to high costs for its earlier ReefShark chipset is something Nokia has been trying to rectify. At the end of 2020 its “5G Powered by ReefShark” portfolio (which includes revamped chipsets) accounted for 43% of shipments – beating a target of above 35%, and on track to achieve 70% by the end of 2021.

“Completing the turnaround in Mobile Networks remains our top priority for 2021, and these visible signs of progress give me confidence that we are on the right track but there is still work to be done,” Lundmark said in prepared remarks. He reiterated Q3 comments that Nokia plans to “invest whatever it takes to win in 5G.”

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This year Nokia anticipates “a significant decline in Mobile Networks,” primarily because it failed to convert all of its 4G footprint to 5G in North America, as well as expected price erosion from intensified competition.

Nokia’s 4G to 5G conversion rate was about 80%, and around 90% when excluding China.  Footprint gains in Europe partially offset the share losses in North America and China.

North America is Nokia’s largest region and accounted 35% of total net sales, while Europe represented 29%, Asia-Pacific 17%, and Greater China 6%.  

Net sales in the networks division were down 7% both in the quarter and for the full year to EUR 5.04 billion and EUR 16.86 billion respectively, mainly because of mobile access and optical networks.

Some bright spots

Some positive points include the vendor’s enterprise business, where sales were up 1% for the quarter and 11% for the full year.

Nokia has struck partnerships for private wireless networks, including with AT&T and Verizon. The vendor has 260 private wireless customers and won 79 new customers in Q4.

Enterprise customers still represent a significantly smaller share of the pie, representing 8% or EUR 502 million of net sales, versus communication service providers which accounted for a full 82% or EUR 5.4 billion in Q4 net sales.  

But Nokia said it’s seen growth in the segment thanks to more demand for mission-critical networking in industries such as utilities and the public sector. In the U.S. Nokia is piloting private wireless with the New York Power Authority, and working with San Diego Gas & Electric on private LTE.  In October ,the vendor was one of more than a dozen companies awarded DoD contracts for 5G testbeds located on military bases.

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Pekka emphasized that while results are encouraging overall, “we expect 2021 to be challenging, a year of transition, with meaningful headwinds due to market share loss and price erosion in North America.” 

In addition, “delivering on our new operating model for a strong and sustainable long-term business requires us to make further 5G R&D investments in 2021, meaning we will sacrifice some short-term margin to ensure leadership in 5G,” Nokia’s chief executive stated.

Nokia reported one-time gains of about EUR 250 million in the fourth quarter, including recognizing about EUR 150 million in net sales that had been expected in 2021. It also recorded a positive operating profit in Q4 and full year 2020.  

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The vendor’s operating margin for 2021 remains intact at 7-10%. Mobile networks are expected to have a comparable operating margin of about zero percent for 2021, with improvements over the longer term.

“Nokia delivered a solid Q4 to end 2020 at the high end of our Outlook range. We saw healthy gross margin and operating margin performance for both Q4 and full year 2020, supported by a regional mix shift towards the higher margin North America region and by our ongoing R&D efforts to enhance product quality and cost competitiveness,” Pekka said.

Nokia plans to give a long-term outlook at a Capital Markets Day on March 18.