Why Nokia Remains Muted About Prospects Despite Huawei’s Mounting Woes
Networking behemoth Nokia (NYSE:NOK) published its Q4 2018 results on Thursday, January 31, beating market expectations on earnings, driven by stronger sales of its network equipment to North America and lower operating expenses. While revenues grew by 3.3% year-over-year to 6.87 billion Euros ($7.86 billion), EPS remained almost flat year-over-year at EUR 0.13 ($0.15). In this note, we provide some of the key takeaways from the quarterly results.
Our interactive dashboard on what driving Nokia’s valuation details our expectations for the company and what’s driving its valuation.
Outlook For 2019 And 2020
For 2019, the company has guided for non-IFRS EPS of between 0.25 Euros to 0.29 Euros, marking only a slight increase from the EUR 0.23 it reported in 2018. Moreover, the company has indicated that its results could be somewhat soft of the first half of 2019, although the second half is expected to be stronger due to a relatively staggered 5G rollout. While Nokia is already providing hardware for the 5G rollout in the U.S., with a total of over 70 5G trials underway globally, it could take a few more quarters before things scale up meaningfully. For instance, South Korean rollouts are expected to start in Q1, while Japanese carriers are likely to commence their rollouts in Q2, with Chinese players beginning their 5G transitions later this year. That said, the 5G cycle is only likely to accelerate in 2020, and the impact is also likely to be visible in the company’s earnings, as it guided for adjusted EPS of between EUR 0.37 and EUR 0.42, roughly 45% ahead of its 2019 guidance at the midpoint. This projected increase is also likely to be driven by the company’s planned 700 million Euros in cost cuts, which are largely expected to occur over 2020.
Can Nokia Benefit From Huawei’s Woes?
Nokia’s Chinese rival Huawei faces increasing scrutiny from governments and regulators in Western markets about whether it promotes spying by the Chinese government, and there is a possibility that it could face a ban on its equipment in multiple markets. However, it remains to be seen whether Nokia can benefit from such a ban, and the company has also refrained from commenting on the same. There could be a few good reasons for this. Firstly, Huawei has been significantly outspending its European rivals on 5G-related R&D over the last few years. For example, Huawei spent about $13.8 billion in 2017 on R&D, while Nokia spent just about $5.2 billion. Moreover, some European carriers have indicated that the 5G offerings from Nokia and its Swedish rival Ericsson are not as sophisticated as Huawei’s, meaning that replacing Huawei equipment altogether will be difficult. Additionally, as China itself is likely to be the biggest driver of 5G spending, it’s possible that the Chinese government could limit the access of global players to its market if Huawei faces a broader ban.
