Nokia Raises Merger Savings Target as Sales Trail Estimates

  • Shares fall as second-quarter revenue drops 11 percent
  • CEO Suri promises more cut costs after Alcatel-Lucent deal

Nokia Oyj, mired in a stagnant market for wireless networking equipment, reported second-quarter sales that trailed analysts’ estimates and said it would find more costs to eliminate as the company waits for demand to rebound.

The shares fell the most in one month after Nokia reported an 11 percent revenue drop on a pro forma basis to 5.68 billion euros ($6.33 billion), missing the average analyst estimate of 5.87 billion euros. Adjusted earnings were 3 cents a share, Nokia said Thursday. That matched the average estimate.

Phone carriers in key markets such as the U.S. have largely built so-called fourth-generation networks, and the next generation, dubbed 5G, isn’t ready for wide deployment. With few near-term options to boost growth, Chief Executive Officer Rajeev Suri is focused on cost-cutting. He raised the target for savings from the acquisition of Alcatel-Lucent SA on Thursday by one-third.

“The merger execution is progressing, but the tough market situation is really weighing on earnings,” Mikael Rautanen, an analyst at Inderes, said in a note to clients. “There is no clear visibility into when earnings will improve.”

Sales of wireless-network equipment are set to shrink 9 percent this year, according to Deutsche Bank AG. Nokia, facing intense competition from Ericsson AB and Huawei Technologies Co., spent about $18 billion for Alcatel to expand beyond mobile infrastructure, pledging to wring cost savings out of the combined operation.

Savings from the merger are set to reach 1.2 billion euros in 2018, higher than the more than 900 million euros the company had projected in May. The Finnish company is said to be eliminating 10,000 to 15,000 positions from the combined staff of 104,000, reducing overlapping products and positions.

"The competitive intensity has been tough and continues to be tough,” Suri said on a conference call with reporters. Nokia’s “execution remains firmly on track” and the additional savings will come from "synergies and normal continuous improvement in our business.”

Share Decline

Nokia fell as much as 7.2 percent, on track for the biggest drop since June 27. The shares declined 7.1 percent to 4.61 euros at 10:37 a.m. in Helsinki. They have lost about 29 percent this year amid investor skepticism the Alcatel combination will help revive earnings growth.

Second-quarter operating profit in the networks division, Nokia’s largest business, shrank 39 percent to 312 million euros, hurt by a customer in Latin America “undergoing judicial recovery.” Nokia also had about 600 million euros of restructuring charges in the quarter related to the Alcatel takeover.

For the third quarter, Nokia predicted a “slight sequential improvement” in sales and operating margin in the networks division. The fourth quarter should see “significant improvement” compared with the third, the company said.

The current generation of mobile networks allows smartphone users to stream video and audio more quickly than before. 5G promises faster speeds and the lower system latency required for more critical tasks like remote surgery.

Carriers in the U.S., China and South Korea are set to roll out 5G networks "relatively quickly,” Suri said on the call, without being more specific. Investments in 4G networks and slightly more advanced 4.5G networks will continue for several years, he said.

After this year’s decline, the wireless-gear market is set to drop another 4 percent in 2017, according to Deutsche Bank. Ericsson in neighboring Sweden ousted its CEO last month and plans to accelerate cost cuts after reporting four straight quarters of disappointing revenue and profit.

Before it's here, it's on the Bloomberg Terminal.