Nokia CEO Rajeev Suri jumped right in with the bad news on the company’s first quarter 2019 earnings call today. “Q1 was a weak quarter for Nokia as we expected,” he said. “We pointed to a soft first half and a particularly weak first quarter, followed by a robust second half. We continue to stand by that view.”
The company reported an uptick in sales in Q1 2019 of €5.1 billion, compared to €4.9 billion in Q1 2018. But, it reported an operating loss of €524 million compared to a loss of €336 million in the same quarter a year ago.
Suri said that due to the “evolving readiness of the 5G ecosystem,” in Q1 2019 Nokia was unable to recognize approximately €200 million of net sales related to 5G deliveries mainly in North America, which it expects to recognize in full before the end of 2019. The company expects the weakness to “mitigate” in the second half of 2019, and is maintaining its guidance for the full year.
Nokia attributed the weakness in Q1 to “competitive intensity” in certain accounts as "some competitors seek to be more commercially aggressive in the early stages of 5G. Although Suri didn’t name Ericsson, he talked about technologies such as software upgrades to 5G equipment and dynamic spectrum sharing, both of which Ericsson has been touting.
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“Software-only upgrades are meaningless unless your hardware has the right capacity,” said Suri. “You could in theory upgrade an old laptop to the latest Windows, but the end result would be lousy performance. Doing something similar to base stations does not make sense to us.”
But, Ericsson has bragged that it had the foresight to upgrade its Radio System hardware a couple of years ago in anticipation of 5G. Ericsson Radio System products delivered since 2015 are able to support 5G NR capability through a remote software installation to enable fast migration to 5G in existing bands. The software is based on the 3GPP Release 15 standard.
Nokia took a different tack with its hardware and software in advance of 5G, and that appears to have left it behind. Suri said, “Recent 5G launches have used the September 2018 3GPP baseline that leading chipset makers do not consider commercial given later changes in the standardization body that are not backwards compatible. We had no new 4G software in the first quarter as we needed to ensure compatibility with our 5G product. We do expect 4G releases to come in each of the three remaining quarters of this year.”
He also said, “Our revenue recognition policies require reasonable commercial availability of our own system software before we can recognize revenue related to a new generation of mobile technology. Neither of these was fully in place by end of Q1. That situation is changing fast. We expect to see some improvement in Q2 and much more in the second half.”
Dynamic spectrum sharing
Dynamic spectrum sharing (DSS), which is part of the 3GPP Release 15, allows operators to dynamically allocate some of their existing 4G LTE spectrum to 5G and use existing radios (as long as they are 5G NR-capable) to deliver 5G services by deploying a software upgrade.
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Ericsson is a proponent of DSS, and the company has said that it expects “multiple large customers” to use DSS around the second half of the year.
But, Suri said of DSS, “Most operators do not see this as a necessary solution in the short to medium term given the spectrum to be utilized in most 5G launches. It also requires unique device functionality that is not yet available until the end of this year. DSS becomes most relevant when operators want to share their old 2G, 3G, or 4G spectrum with 5G especially in lower bands. For those customers with near term needs for DSS, we will have the right features at the right times.”
Nokia says it now has 36 5G commercial contracts, and 18 of those are with named customers.
“As the year progresses, we expect meaningful top-line and margin improvements,” said Suri. “5G revenues are expected to grow sharply, particularly in the second half of the year, driven by our 36 commercial wins to date.”
The company’s stock is trading down about 9.5% today.