February 1, 2018 / 7:09 AM / 3 months ago

Nokia CEO sees networks recovery as patents boost results

HELSINKI/LONDON (Reuters) - Telecom network gear maker Nokia posted better-than-expected 2017 profits on Thursday and said it rebounded from costly prior sales hiccups, encouraging investors spooked by a weakening equipment market and acquisition integration missteps.

File Photo: A Nokia sign is seen at the company's headquarters in Espoo, Finland, May 5, 2017. REUTERS/Ints Kalnins

Nokia shares bounded 15 percent higher on results which showed fourth-quarter group operating profit rising 7 percent to 1.0 billion euros ($1.2 billion), well ahead of a Reuters poll forecast of 888 million euros.

The profits were boosted by a one-off catch-up patent payment of 210 million euros from China’s top smartphone maker, Huawei . Operating profit from the networks business fell 25 percent year-on-year.

The network industry, dominated by Huawei, Nokia and Sweden’s Ericsson, is weathering the toughest part of a decade-long cycle as demand for 4G gear falls, while spending on new, mass-market 5G networks is unlikely before 2019 or 2020.

“We are coming back very fast,” Chief Executive Rajeev Suri said of the Finnish company’s mobile networks business.

He said the company had moved quickly to fix internal problems it had convincing U.S. carriers to swap out existing Alcatel equipment for comparable Nokia gear - the main reason for its shares losing a quarter of their value since October.

While network sales will remain weak during 2018, a potential rebound of spending by operators in North America could lessen the decline, he said.

“We see some positive signs coming from our North American customers,” Suri told investors on a conference call to discuss the results. “The desire to move fast to 5G is certainly there.”

Nokia generated 30 percent of fourth-quarter network sales in North America, up slightly over the third quarter, while Asia-Pacific and Greater China declined.

“For 2019 and 2020, we expect market conditions to improve markedly, driven by full-scale rollouts of 5G networks,” Suri told a conference call.

Suri said Nokia’s stepped-up capital spending to win future 5G upgrade deals will weigh on the network unit’s profitability this year. He forecast an operating margin of 6-9 percent for 2018 before it starts to rebound to around 9-12 percent in 2020.

“The guidance for this year is slightly disappointing, but the forecast for 2020 is encouraging,” said Mikael Rautanen, an analyst at Inderes Equity Research who has a “buy” rating on the stock.

MARKET SHARE GAINS SEEN

Suri said Nokia is gaining a major share of competitive bids for new business against its major European competitor, rival Ericsson of Sweden, not only in core wireless radio equipment but from a broader portfolio of products and services.

Nokia has refreshed key product lines in the past year to get ready for the next generation of 5G network equipment and he said these upgrades remain 12 to 18 months ahead of rivals.

“I expect we will increase our 5G share relative to what we had in 4G,” Suri said, referring to full-scale rollouts of next generation networks the company sees beginning in 2019.

While Ericsson on Wednesday reported its fifth straight quarter of losses, Nokia has coped better with the downturn, thanks to its 2016 acquisition of Alcatel-Lucent that broadened Nokia’s portfolio.

Ericsson shares fell 9 percent following its results, but recouped 3 percent on Thursday, as investors bet on prospects for an eventual 5G-led recovery.

Analysts noted that ahead of any 5G rebound, Nokia will also be helped by its patent licensing business where it expects sales to grow around 10 percent through 2020.

While about 90 percent of the company’s sales come from network equipment, licensing payments on Nokia patents are highly profitable, and the company has recently struck licensing deals with all the main handset makers.

The mobile phone patent portfolio stems from the time when Nokia was the world’s largest cellphone maker.

Nokia sold the handset business to Microsoft in 2014, but last year brought its name back to the smartphone market with a brand-licensing deal.

($1 = 0.8059 euros)

Reporting by Jussi Rosendahl and Eric Auchard; Additional reporting by Tuomas Forsell; Editing by Alison Williams and Keith Weir

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