Nokia Oyj started as a single paper mill in 1865. In recent years, it’s the stock that has been through the mill, as the maker of telecommunications equipment has ebbed and soared with each burst of spending on next generation mobile networks.
Chief Executive Officer Rajeev Suri has steadily toiled away to drag the Espoo, Finland-based company through to the next leg of growth promised by 5G. The fruits of that labour appear finally to be paying off.
It’s early days, but adjusted operating profit hit €451 million ($502 million) in the three months through June, exceeding analysts’ €303-million average estimate. The shares jumped as much as 9 per cent.
At the start of the year, the situation looked tough. Nokia posted an operating loss of €59 million, when analysts had predicted a €283-million profit. Suri stuck by his 2019 targets, though plenty thought him brave to do so.
But the scale of the outperformance in the second quarter shows we maybe should have taken him at his word. He predicted a soft first half with a “particularly weak” first quarter, and it was just that. He continues to predict a “soft” third quarter followed by an acceleration on 5G spending towards the end of the year. Suri has communicated clearly and kept his promises, unlike Nordic competitor Ericsson AB.
The surprising second-quarter numbers mean that Nokia can actually afford to perform slightly worse than analysts currently expect in the second half of the year and still meet its full-year goals of a 9 per cent to 12 per cent operating margin, earnings per share of €25 cents to €29 cents, and “slightly positive” recurring free cash flow.
Of course there are risks. While Nokia is well positioned to capitalise on Chinese rival Huawei Technologies Co’s ostracisation by the US, it’s also losing business from Chinese carriers who are preferring their domestic suppliers. Sales in Greater China fell 5 per cent in the first half.
The Finnish firm is meanwhile working to shift manufacturing capacity out of China to avoid tariffs on goods made there. But given that China was always likely to start sourcing more from domestic suppliers, irrespective of US pressure, the opportunity presented by Huawei’s troubles seems greater than the risks.
Nokia is not out of the woods yet. It still needs a blockbuster second half to meet its goals, and the fourth quarter will be crucial. But with good visibility on 5G orders, and a year-to-date that has followed the trajectory Suri predicted, there’s every reason to believe he can hit them.