Nokia has cut its outlook for this year and next, citing tough competition in the early days of the 5G market. The company said it will suspend dividends in Q3 and Q4 in order to invest more in improving its portfolio and strengthening its cash position.
The revised outlook came alongside third-quarter results showing revenues up 4 percent to EUR 5.7 billion, with organic growth of 1 percent. Adjusted operating profit fell 2 percent to EUR 478 million, and the margin was down half a percent point to 8.4 percent.
Nokia blamed the lower result on a drop in the gross margin at the Networks division, which was hurt by high costs for new 5G products and deployment services. The company said it also faced "profitability challenges" in China, pricing pressure in early 5G deals and lower spending in the US due to the pending merger of T-Mobile and Sprint. This was offset somewhat by growth at Nokia software and in the enterprise market.
Adjusted EPS fell 17 percent to EUR 0.05 per share, and the company's cash position shrunk 82 percent to EUR 344 million. Nokia said cash flow was positive and it aims to return to paying dividends once the cash position rises to over EUR 2 billion.
In line with market growth
Looking ahead, Nokia said it no longer expects to outperform the market and instead will aim to grow in line with the overall market in 2019 and 2020. In 5G, the company sees increased competition from rivals trying to take market share and said it will need to invest more to accelerate its product roadmaps and cost competitiveness. Investment areas include system-on-chip based 5G hardware and diversifying and strengthening the related supplier base.
For 2019, this means an adjusted operating margin of around 8.5 percent, down from the earlier forecast of 9-12 percent. The fourth quarter should remain strong and reach a margin of around 16.5 percent. The EPS target was cut to around 21 cents from 25-29 cents, and recurring free cash flow is now expected slightly negative, rather than the slightly positive previously forecast.
For 2020, Nokia expects a small improvement to a margin of around 9.5 percent, adjusted EPS of EUR 0.25 (+/- 5 cents) and positive cash flow. Over the longer term (3-5 years), the aim is to reach a margin of 12-14 percent, down from its previous target of 12-16 percent in 2020.
