Nokia Charge Nips Profits

Nokia Corp.’s (NYSE: NOK) troublesome network division continues to strangle company growth, with a €399 million (US$446 million) restructuring charge suffocating profit levels within the Finnish vendor’s second-quarter earnings results today (see Nokia Q2 Profits Plunge).

Despite a 1 percent increase in net sales -- €7.019 billion ($7.84 billion) compared to €6.935 billion ($7.7 billion) in the same quarter last year -- net profit fell 28 percent to €624 million ($697 million). Diluted earnings per share also fell, landing at €0.13 (15 cents) for the second quarter, compared to €0.18 (20 cents) for the year-ago quarter.

Such woes stem from a charge relating to the culling of 1,800 staff and costs incurred with the closure of research and development facilities (see More Finns Finished).

According to CEO and chairman Jorma Ollila, the short term future doesn’t appear much brighter either.

Although network sales of €1.5 billion ($1.7 billion) remain flat year-on-year, the head man is sticking to his belief that the market as a whole will decline by 15 to 20 percent in 2003 (see Finns Flummoxed, Flopping and Nokia Dismisses Network Upturn). “We do not see any signs of improvement in the infrastructure markets this year,” he told analysts in a conference call. “Operator investments have decreased to exceptionally low levels, and network rollouts continue slowly. We expect the overall market to contract by 15 percent or more.”

As a result, the company warned it expects to post a small pro forma operating loss in the third quarter.

Looking further forward, the CEO is optimistic that 2004 will provide a glimmer of hope for future market recovery. The company predicted demand for network equipment next year will be “flattish,” against earlier expectations of a slight fall.

Closing the announcement, Ollila acknowledged the significance of recent high-profile problems with its W-CDMA infrastructure kit, claiming that the company has overcome its earlier setbacks (see Nokia Suffers 3G Blow and Hutch's Nokia Network Woes?). “We saw strong improvements in product quality and are now confident we rank among the few top W-CDMA vendors in terms of the product and network quality. We are satisfied with progress made during the quarter.”

Analysts believe the Finnish vendors results do not bode well for market leader Ericsson’s second-quarter announcement due tomorrow. Stuart Jeffrey of Lehman Brothers comments that Nokia’s network difficulties are “not encouraging” for the market leader and believes the market is more likely to experience future “stabilization” rather than “an uptick.”

Nokia shares have taken a hammering as a result of today’s earnings report, plunging 19.5 percent to $14.44 a share at time of press.

— Justin Springham, Senior Editor, Europe, Unstrung