Nokia Q4 Net Profit Beats Market Expectations as Operators Await 5G Networks

The demand for faster 4G mobile broadband equipment has peaked by telecom operators, and as they await the deployment of 5G networks in the coming years, sales will continue to decline for network equipment vendors globally. However, Nokia (News - Alert) has reported a better-than-expected quarterly profit as it continues to cut costs in the highly competitive networks market. Even though Nokia's network unit sales fell 14 percent in the fourth quarter of 2016, which was more than expected, the operating margin of 11.7 percent the market forecasted was beaten, with the company reporting 14.1 percent.

By now, everyone is well aware that Nokia miscalculated the impact smartphones would have in mobile communications. At that time the company was the clear global leader, but after Apple and Samsung dominated the market, Nokia sold its handset business to Microsoft (News - Alert) in 2014, which left the company a portfolio of technology patents and the network business.

As a leading communications company, Nokia has a portfolio of highly lucrative patent royalty, which it is enforcing by going after any company that violates these patents. Apple (News - Alert) is the latest company facing a lawsuit filed by Nokia in December for violating its patents. But Nokia's main focus has now become networks, 5G and the Internet of Things (IoT), even as a new line of smartphones are hitting the market with its name under a licensing agreement with HMD Global.

The better than forecasted numbers for the fourth quarter were driven by growth in its submarine cable business and opportunities in North America, India and Japan, despite the fact the global networks market declined by 2 percent during 2016.

On a conference call covered by Reuters (News - Alert), Nokia Chief Executive Rajeev Suri told reporters, “We continue to expect our performance to improve in 2017 and see the potential for margin expansion in 2017 and beyond, as market conditions improve and our sales transformation programs gain further traction. Our plan is to make the most of the market this year, be efficient, maintain our pricing discipline, ensure our synergies happen and we get the cost reductions.”

Nokia had already warned the market for the sales of network equipment would slump 2 percent in 2017, with growth expected at a paltry 1.2 percent on a compound annual basis until 2021. With 5G networks not expected to roll out until 2020, the next three years will prove to be challenging for network vendors, including Ericsson (News - Alert) and Huawei.