Nokia fails to turn around sales decline in Q3

The Finnish vendor posted a 7% on-year slide in net sales in constant currency for the three months to the end of September to €4.27 billion; the reported dip was 8%.

That's something of a kick in the teeth for Nokia chief executive Pekka Lundmark, who predicted "meaningful improvement" in sales in the second half of the year after a dismal set of Q2 numbers.

You could argue that there is some improvement there. Nokia's sales dropped by 18% year-on-year in the second quarter, so the Q3 reduction is a step in the right direction, particularly given that the firm managed to turn around the sales decline at its Network Infrastructure unit. It also reported growth in operating profit, unlike in the previous quarter, and improvement in its gross margin.

And to its credit, Nokia did not shy away from the sales issue, admitting that its recovery there "continues to be slower than expected," all the while focusing on the positives, of course.

"As I reflect on our performance in the third quarter, I am optimistic we are now turning the corner in many parts of our business, even if some continue to experience market weakness," Lundmark said in his commentary on the Q3 numbers.

"Among the key highlights was a return to net sales growth in Network Infrastructure with Fixed Networks growing 9% in constant currency and IP Networks growing 6%. Order intake in Network Infrastructure continued to be robust with strong year-on-year growth and a growing order backlog," he said.

Lundmark highlighted that order backlog and strong order intake trend as drivers of future sales improvement in Q2 as well. It just seems to be taking longer to come to fruition than the vendor would like.

"There are reasons for optimism across our portfolio. We expect a significant acceleration in growth in Q4 in Network Infrastructure and see a number of structural demand trends supporting our future growth," he said. "In Mobile Networks, although market dynamics are more challenging, we have secured several important deals in the quarter, remain confident in our competitive position and are improving our gross margin."

Those deals came in India, Japan, Brazil, New Zealand and Vietnam, Nokia noted. The Indian one is of particular note, given that it covers 4G and 5G network rollout for Vodafone Idea, which has yet to get into the 5G market. But details are thin on the ground; we don't actually know to what extent Nokia will be involved.

Nokia's Mobile Networks sales dropped by 17% on-year, impacted primarily by weakness in India, where the big two operators – Reliance Jio and Bharti Airtel – are now past the peak of their 5G buildout. Indeed, just like in Q2, three quarters of Nokia's overall net sales decline can be attributed India and a strong year-earlier quarter there.

Mobile Networks is Nokia's biggest division, accounting for 40% of net sales in Q3 – or €1.75 billion – closely followed by Network Infrastructure.

And its in Mobile Networks where Nokia seems be lagging arch-rival Ericsson at present. Ericsson posted a stronger-looking set of Q3s earlier this week, its overall sales decline coming in at just 1% on an organic basis after a couple of quarters of steeper falls. Ericsson is performing especially well in North America, presumably on the back of the AT&T deal announced in December last year. Meanwhile, Nokia's recent contract awards have come from much further afield.

The pair are united in their desire to paint a positive picture of market improvement though. And both reported profit and margin improvements and a decent cash performance. Nokia's operating profit was up 4% in Q3 to €246 million, while its gross margin improved to 45.2% from 40.2%. And its free cash flow came in at €621 million during the quarter, enabling Lundmark to predict it will be at the high end of its FCF target of 30%-60% conversion from comparable operating profit for the full year.

But despite Nokia's optimistic posturing, it's worth noting that it changed its full-year outlook for net sales at both of its major business segments. Mobile Networks is now expected to post sales that are 19%-22% down on last year, having previously guided for a 14%-19% decline.

And it's also worth noting that while the market reacted favourably to Ericsson's latest numbers, Nokia's shares nosedived on Thursday morning. The recovery may be coming, but it seems to be in no hurry.