• Radio access network (RAN) system orders are strong despite macro economic pressures, says Nokia’s CEO
• Vendor’s financials are looking stronger, with Q2 sales up and mobile network product sales improving 
• Supply chain challenges are starting to ease
• Portfolio diversification is helping, with FTTP, routing and optical units continuing to perform well
• Investors are encouraged as Nokia’s stock gains more than 8%

The radio access network (RAN) market is holding up well despite increasingly tough macro economic conditions, with demand for network infrastructure technology to support 5G rollouts expected to remain strong in the near term, Nokia’s president and CEO Pekka Lundmark noted during Thursday’s second-quarter earnings conference call.

Demand for mobile network equipment is helping Nokia’s numbers: Following a sustained period of declining sales, the vendor’s Mobile Networks division reported a year-on-year increase in revenues of 1% (at constant currency exchange levels) to almost €2.6bn. The division’s margins also improved as more of its shipped products were based on the vendor’s ReefShark chipsets rather than more expensive field programmable gate array (FPGA) components – 91% of shipments in the second quarter were ReefShark-based, with 100% expected by the end of this year.  

And that demand is set to continue, noted Lundmark, despite the continued macro economic impacts of inflation, recession, the ongoing conflict in Ukraine and Covid-19 lockdowns (especially those in China) on the technology supply chain. 

“What we are hearing from our customers is that their [radio access network] plans for 2023 seem to be pretty strong. And we have to remember there are countries and regions that haven't even really started on 5G yet – obviously India is one of the most important one here… Latin America is the same thing, it's only starting now. So that's why we believe we are still early in the 5G cycle,” noted the CEO. 

In fact, Nokia estimates that only 15% of mobile network sites (outside of China) have been upgraded to 5G, so there is a lot of growth still to come (though just what final percentage of sites will get a 5G upgrade and over what timeframe is uncertain). 

This view that there will continue to be a strong pipeline of demand for RAN technology for 5G rollouts mirrors that of Lundmark’s counterpart at Ericsson, Börje Ekholm, who talked about the same industry dynamic when the Swedish vendor discussed its second-quarter results, though Lundmark did also note that Nokia, like any company, “is not immune to macro economic cycles – of course they play a role, but we can only comment on what we are seeing today.” See Ericsson pins its hopes on long-term 5G momentum and an enterprise boom.

And what Nokia is seeing is a slight easing in the supply chain challenges that have been affecting all industries over the past couple of years. 

“We continue to see strong investment trends in connectivity, particularly in 5G and fibre deployments. And those investments are very important [in helping] many of our customers to cope with increasing data consumption and the need to increase productivity… customer demand and ordering remains strong and we continue to be more supply than demand limited,” noted Lundmark, though the supply challenges caused by component shortages are starting to ease, he noted. 

In terms of the company’s supply chains, “this has been a really challenging situation globally. We've been dealing with it in a number of ways since the pandemic hit… throughout last year, we were facing constraints across a lot of suppliers in the business. In the first quarter [of this year], we said the situation was changing a bit [with] more supplier-specific challenges constraining our business. Today, that largely remains the case, but we do see signs of the remaining challenges starting to ease in the second half of 2022 and into the first half of 2023,” said the CEO. 

Even with various supply chain and macro market constraints, Nokia’s Network Infrastructure division, which comprises its optical, IP networks (routing), fixed networks (broadband access) and submarine networks product lines, has been performing extremely well over the past year or so, and continued to do so in the second quarter, as revenues increased by 12% (at constant currency exchange levels) to €2.15bn, with all four segments increasing revenues year on year. The fixed networks (broadband access) unit grew by an incredible 22% to register second-quarter sales of €713m. 

That’s a set of product lines its rival Ericsson doesn’t have but, like its Swedish counterpart, Nokia is hot for the enterprise market, where it sees great potential sales growth for its optical and fixed broadband as well as wireless products. The Finnish vendor has long been a trailblazer in private wireless networking systems, and claimed 485 deals at the end of June (of which 35 were new during the quarter), and overall its sales to enterprise customers accounted for about 7% of all revenues over the quarter. 

In total, Nokia’s revenues for the second quarter were up by 3% (at constant currency exchange levels) to €5.87bn, while its operating margin came in at 9.6% compared with 9.1% a year earlier. The company reiterated its full-year sales forecast of €23.5 to €24.7bn.

Nokia’s share price climbed by 8.7% on the Helsinki exchange to €4.99.

- Ray Le Maistre, Editorial Director, TelecomTV