Nokia's Profit Expected to Drop Ahead of 5G Fillip

Telecom network equipment maker Nokia is expected to post another plunge in quarterly profits on Thursday ahead of an anticipated boost later this year from next-generation 5G networks.

The industry has struggled since demand for the current generation of 4G mobile equipment peaked in 2015, but the Finnish company has forecast 5G roll-outs will start later this year in the United States, followed in 2019 by renewed buying cycles in Japan and South Korea.

"This should be the last weak quarter of this network market cycle," said Mikael Rautanen, an analyst at research firm Inderes, who has a "buy" rating on the stock.

Chief Executive Rajeev Suri is upbeat on the outlook for the second half: "Almost all profit expectations for their network business are based on his words at the moment," Rautanen said.

Shares in the company were boosted last week as Swedish rival Ericsson posted an unexpected swing to a modest operating profit, citing growing 5G sales in North America. Nokia stock is up 30 percent year-to-date.

"Until now, Ericsson was more cautious than Nokia about the outlook, so this is encouraging," Rautanen said.

The average forecast for Nokia's second quarter operating profit is 373 EUR million ($436 million), down 35 percent from a year earlier, according to a Reuters poll of analysts.

Profits will suffer from investments it is making to prepare for upcoming 5G business, analysts said.

Sales in the network business, which makes around 90 percent of Nokia's revenue, are seen falling 8.6 percent to EUR 4.5 billion.

Rautanen said that the US trade ban on Chinese telecom equipment maker ZTE may offer further help. Due to the ban, ZTE has lost a deal to upgrade radio equipment for Italy's Wind Tre, which will use gear from Ericsson instead, sources said.

"Although the ban has been lifted, operators are cautious... it is quite a risk for them if the vendor can't deliver what is needed, so this should be positive (for Nokia) in the short-term," he said, referring to possible additional contract wins.

The majority of Nokia's bottom line in the second quarter is expected to come from its highly-profitable patent licensing business, which stems from the times Nokia was the world's largest handset maker.

© Thomson Reuters 2018