Nokia Earnings: Few Surprises After Last Week’s Guidance Cut and Ericsson Results

Nokia NOKIA experienced the same headwinds as Ericsson in the second quarter, with the primary culprit being a big slowdown in North American carrier spending and the mix-shift away from the more profitable North American region, resulting in a reduction in margins. The weak results were well-telegraphed—management previously said customers were pulling back on spending, U.S. mobile carriers foreshadowed less network investment in 2023, and Nokia cut its full-year guidance last week. We are not changing our long-term forecast and don’t expect much annual revenue growth in the long term. We are maintaining our EUR 6 fair value estimate.

Total sales were down 3% year over year, with North American revenue down over 40%. Not only were U.S. carriers more rapidly building their wireless networks last year, but they were also building up inventory due to supply chain concerns. Nokia believes carrier inventory is normalizing, so we expect significant improvement after 2023, though we still think carrier 5G spending in North America will remain below last year’s levels. We expect spending throughout the rest of the world will more than make up for the lower North American spending in the near term, as most countries still have significantly more 5G building to do. This year, India has been the hottest market, with first-half sales up more than 300% year over year.

Nokia’s gross margin contracted 2 percentage points compared with last year’s second quarter, while its comparable operating margin was down more than 1 percentage point. Like Ericsson, the main culprit was the geographic mix shift away from the more profitable North American market. The contraction would’ve been worse had Nokia not received catch-up intellectual property revenue in the quarter, which is 100% profit. Still, we don’t expect further deterioration, as margins in other business segments were good, we expect the mix shift to improve, and management expects to realize cost efficiencies.