Nokia To Replace CEO On Failed 5G Plan: Cause For Alarm?

Under the leadership of CEO Rajeev Suri, shares of Nokia (HE:NOKIA) Corporation (NYSE:NOK) have fallen by more than a third, witnessing a decline of 35.4% in the past year. As a result, the Finnish company has decided to reshuffle its management by replacing present CEO with Pekka Lundmark, who is currently the CEO of electric services company — Fortum. Needless to say, Nokia is leaving no stone unturned to regain its position in the global arena, especially in the age of intense 5G competition.

What Ails Nokia?

The telecom equipment maker’s performance was appalling last year, primarily due to rising cost of sales, operational inefficiencies and intense competition coupled with its inefficacy to catch up with rapid technological advancements in the 5G era. Moreover, its shares witnessed a major drop in October 2019 due to disappointing third-quarter 2019 earnings. This was followed by its decision to suspend dividend payments and slash guidance for 2020.

Known to suffer from prolonged organizational dysfunctionalities, the company’s chairman Risto Siilasmaa’s decision to quit after eight long years stirred speculations of possible changes in overall management. Reportedly, Risto will be succeeded by Sari Baldauf in April 2020. The move did not come as a surprise after Suri warned that any further investments to thwart 5G competition might affect its profitability in the days to come. All these slipups led to a downtrend in Nokia’s shares amid mounting fears of Huawei’s presence in the European telecommunications market.

Nokia’s financial performance in the past year, too, took a backseat as its gross margin was negatively impacted by a high cost level associated with its first generation 5G products, product mix and profitability challenges in China. Despite a 4.2% rise in revenues in third-quarter 2019, the performance was hurt by pricing pressure in early 5G deals and temporary capital expenditure constraints in North America related to the proposed merger of T-Mobile US, Inc. (NYSE:S) and Sprint Corporation (NYSE:S) .

The troubled company has largely been a victim of these vulnerabilities as it faced escalated 5G product costs in Networks segment with higher levels of deployment service costs. Notably, the inability to undertake additional investments related to its 5G system-on-chip development hinders its cost-efficiency feature. As a result, its profitability gets hampered by arch rival Ericsson (NASDAQ:ERIC) , which spends hefty amounts on R&D. The geared up 5G spending cycle and dearth of resources have put Nokia at the risk of losing out on upcoming commercial launches. Paucity of demand due to geopolitical uncertainties and challenging macroeconomic environment takes a toll on its top-line growth.

Future Uncertain for Nokia?

In order to combat the dire circumstances, Nokia is reportedly planning to explore strategic opportunities like investment shift, asset sale or a potential merger with Ericsson. The merger, which is anticipated to aid both the companies, will not only challenge aggressive pricing structure adopted by Huawei, but will also help the distraught company to emerge as a dominant player in the domain of next-gen smartphone technology.

Huawei, which is considered to be the primary reason for the alleged merger, is a threat to the Nordic companies. As a result, the Trump administration is contemplating to back Nokia to deter Huawei’s operations in the European market. This can either be achieved through direct funding or through consortium of private American and allied companies, backed by a $1 billion-plus government funding. In fact, the U.K. government’s decision to put a 35% cap on Huawei has also proved to be favorable for Nokia due to its augmented presence in European markets.

Although the Zacks Rank #3 (Hold) stock has been struggling amid intense competition and geopolitical tensions, it is one of the few companies that has secured more than 50 commercial 5G deals worldwide from diverse organizations. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Despite all these promising efforts to stand out as a distinguished player, it seems that Nokia’s management suffers from innate maladministration as its 5G strategy failed to reward shareholders with healthy ROI. Does this portend ominous signs for the once-hailed network gear maker?

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