Nokia Faces Profit Drop in Q2 as 5G Gear Sales Slow Down in North America

Finnish telecommunications equipment group Nokia (NOKIA.HE) reported a decline in second-quarter profit due to a decrease in margin, primarily caused by a slowdown in the sales of 5G gear in low-margin markets, such as India. Unfortunately, this decline failed to offset the impact of slowing demand in high-margin markets like North America, which has been a challenge faced by both Nokia and its rival, Ericsson (ERICb.ST).

Slowing Orders from North American Markets

The two telecom giants have been grappling with a slowdown in orders from their major customers, particularly in the high-margin markets of North America. Chief Executive Officer, Pekka Lundmark, stated in an interview that they were expecting a slowdown after strong performances in 2021 and 2022. However, during the second quarter, they received signals from several North American operators indicating that they were scaling back their investments even more than anticipated.

Revised Outlook and Quarterly Results

The recent quarterly results come shortly after Nokia reduced its annual sales and profit margin outlook. Ericsson also reported a significant decline in quarterly profit. In the second quarter, Nokia’s comparable operating profit dropped to 626 million euros ($702.37 million) from 714 million euros in the previous year, though it managed to beat market estimates. A new patent license agreement with Apple (AAPL.O) provided some positive impact on the results.

Impact of Regional Mix on Gross Margin

The slowdown in North American markets had a negative impact on Nokia’s gross margin, which declined by 180 basis points to 38.8% in the second quarter. This reduction was somewhat offset by gains made in the Indian market, although at a lower margin. Nokia noted that the Indian rollout of 5G was progressing rapidly but acknowledged the need for moderation in the following year.

Success in the Indian Market

Despite the challenges in North America, Nokia managed to make gains with Indian operators, particularly with major players like Reliance Jio Infocomm. In the past, Samsung dominated the Indian 4G market, but Nokia successfully secured a significant share of the 5G market with key operators.

Short-term Demand Impact

Pekka Lundmark reassured investors that the demand impact experienced was mostly short-term in nature. He remains optimistic about Nokia’s prospects, viewing the current situation as a matter of timing rather than a long-term trend.

Second-Half Outlook

Looking ahead, Nokia expects the net sales in the second half of the year to be broadly similar to those in the first half, with some sequential improvement anticipated in the fourth quarter.

Conclusion

Nokia faced challenges in the second quarter due to slowing demand in high-margin North American markets, despite the growth in sales of 5G gear in lower-margin regions like India. The company remains positive about its future outlook, attributing the current demand slowdown to short-term factors and expressing confidence in the long-term potential of the 5G market. As the telecom industry continues to evolve, Nokia is poised to adapt and capitalize on emerging opportunities.