Nokia saw its business improve in the third quarter, even as supply chain shortages made an impact and mobile networks sales declined.
The telecom equipment vendor reported 2% net sales growth year over year to EUR 5.4 billion ($6.3 billion), with operating profit up 43% to EUR 502 million and net income up a whopping 78% to EUR 351 million. Nokia’s operating margin improved to 11.7%, which CEO Pekka Lundmark held up as further credence of positivity from the company’s new operating model.
Lundmark took over as chief executive last year and implemented a business reorganization, with a three-pronged plan for turnaround.
However, for the third quarter Nokia’s large mobile networks business wasn’t the star of the show, with Lundmark citing the impact from expected headwinds in North America. Overall business in North America grew 9% across Nokia, but the vendor didn’t break out regional growth by segment.
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Mobile network sales networks sales dropped 5% versus Q3 2020 to EUR 2.32 billion. Lundmark pointed to customer decisions made last year as a driver. In the U.S. Verizon awarded a large $6 billion 5G contract to Samsung in September 2020. Nokia’s been working to regain cost competitiveness in the region and focused on stepped up technology R&D investments, correcting for earlier issues related to 5G field programmable gate array (FPGA) chips with higher costs that cut into 5G profit margins years prior but have since shifted to custom system on a chip (SoC) silicon for ReefShark.
He still expressed confidence for improvements in North America and doesn’t expect the situation to get worse in Q4.
“We've been doing well in North America in terms of new decisions and our product competitiveness and our market position…” Lundmark said on Thursday’s earnings call. “So from that point of view, I believe that we have, in a way, now been able to stabilize the situation” with the goal of positive improvement after Q4.
Nokia has 189 commercial 5G deals and 72 live communication service provider 5G networks. June saw the introduction of its latest AirScale 5G RAN portfolio.
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While mobile networks make up the bulk of Nokia’s business, other segments helped make up for the shortfall. Sales in fixed networks were up 6% versus Q3 2020 and cloud and network services (which includes 5G core and private wireless) grew 12%. Nokia now has 150 5G core customers and 380 private wireless customers.
Despite double-digit growth in private wireless, enterprise business sales were down 4% for the period.
Supply chain crunch
As Nokia reported positive financial progress, supply chain constraints impacted the vendor and could get worse before getting better.
Year-to-date Nokia’s seen 6% top line growth, which Lundmark said could’ve been more if not for challenges with the supply chain. He noted the backdrop of global semiconductor demand far outpacing supply, combined with what Lundmark characterized as unprecedented component cost inflation in the industry.
Rival Ericsson also reported feeling a pinch on individual components as it started to see supply chain impacts, which resulted in the loss of some sales for the Swedish vendor in Q3.
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Nokia opted not to quantify the impact of component shortages on sales for competitive reasons, but during Thursday’s presentation Lundmark said “it is meaningful, and it is actually increasing.”
In addition to ensuring components are available for customers, one goal in addressing the issue is to minimize impact on Nokia’s margins. But the vendor still expects challenges to continue in Q4 and uncertainty in 2022.
“This is not the Nokia specific issue. This is an industry issue, but it would be naive to say that it would not affect us as well,” said Lundmark. “It will and it is possible that the situation will get more challenging before it then starts getting better.”
The supply chain woes are leading to expectations of 5% growth for Nokia’s total addressable mobile networks market in 2021, down from previously expected 6%.
Demand isn’t the issue, as it sees growth potential across the vendor’s businesses for 2022.
“Overall, we see growth opportunities in all the businesses next year. But we are not going to be limited by demand side,” he said. “Next year, this whole game will be more supply game compared to what it is typically been.”
That said, for most cases it’s more a matter of sales or delivery getting delayed rather than a total loss, according to Lundmark.
One area not feeling a squeeze is the cloud and network services business because it’s focused on software-based offerings.
Longer 5G peak cycle
Nokia sees the peak of the 5G cycle as still two to three years off, with potential for a greater number of use cases ultimately helping to drive a longer investment period than earlier technology generations.
“We believe that there are good reasons to believe that this peak could actually last for a longer period of time [than 4G] and then it would gradually start declining towards 2030 when then 6G will start hitting the market,” Lundmark said.
Use cases on the consumer side are one aspect, as is European investment that’s currently lagging compared to other regions but is picking up, and - a key target for Nokia – industrial digitization.
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Industrials are a large segment Nokia’s had its eye on, including with private wireless. Lundmark called out the ability to improve productivity with a combination of 5G, artificial intelligence and the cloud.
“When we are talking to all customers and observing what serious, big, heavy industrial actors are planning at the moment, it's actually quite encouraging,” Lundmark said. “Almost all of them are one way or another going to invest in next-generation connectivity, especially in 5G.”
And there are 15 million industrial campuses in the world – “an amazing number” – that he thinks will provide significant opportunity for several years to come.