Nokia’s Q2 profits take a sharp dip due to weak network business

Nokia’s second-quarter profit fell more sharply than expected, partly the result of telecom operators spending less on faster mobile networks, while the company raised a cost-cutting target for its newly-acquired Alcatel-Lucent business.

Nokia said on Thursday second-quarter earnings before interest and taxes fell 49 percent to 332 million euros ($370 million), clearly missing the average analyst forecast of 400 million given in a Reuters poll of analysts.

The company, which took control of French network gear maker Alcatel-Lucent earlier this year, raised its cost-cutting target for the merger, saying it was now seeking annual savings of 1.2 billion euros in 2018, compared to more than 900 million euros previously.

Nokia, once the world’s biggest mobile phone maker, was caught out by the rise of smartphones and ended up selling its handset business to Microsoft Corp in 2014. It now focuses on telecoms network equipment.

Its group sales dropped 11 percent from a year ago to 5.67 billion euros, including a fall in network equipment sales to 5.23 billion, which compared with a market consensus of 5.42 billion.

The company said sales of mobile network products were particularly weak, accounting for around 80 percent of the overall decline in network sales. Overall, the networks division’s revenue fell in all major geographies and decreased 12 percent both in North America and Europe, its two largest regions.

The network business’s margin was 6.0 percent in the quarter, compared with a market view of 6.8 percent.

Nokia blamed the weak margin on Brazil operator Oi’s filing for bankruptcy protection in June and said excluding that, the margin would have been nearly 7 percent.

“(We) expect to see slight sequential improvement in both net sales and operating margin in our networks business from the second quarter to the third, followed by significant improvement from the third to the fourth quarter,” chief executive Rajeev Suri said in a statement.

Nokia repeated its full-year forecast for network sales to fall but changed the target for the operating margin to 7 to 9 percent from more than 7 percent previously. Analysts had expected a full-year margin of 8.8 percent.

“It a slight disappointment, so there is pressure to revise market expectations,” said Mikael Rautanen, analyst at Inderes Equity Research, who has a ‘reduce’ rating on the stock. “The stock will fall clearly,” he said.

The rationale for Nokia’s Alcatel-Lucent 15.6 billion euro deal was to make it easier to compete with Sweden’s Ericsson and China’s Huawei in a market with limited growth prospects until a fresh cycle of network upgrades begins around 2020.

Mobile network spending on the latest generation of 4G equipment has peaked in the biggest markets, forcing equipment makers to rely on incremental upgrades. Operators are also pushing to cut costs by switching to virtual networks, meaning they are spending less on network hardware.

In May, Nokia signed a licensing agreement to bring Nokia-branded smartphones back to the market.