Nokia boosted by T-Mobile US deal as profits tank (2025)

Achieving profit targets this year will be 'harder' after recent charges, says Nokia CEO Justin Hotard. (Source: Nokia)

The US mobile market has not been kind to Nokia this decade. In September 2020, as operators were taking baby steps in 5G, Verizon switched from the Finnish vendor to Samsung in a $6.6 billion deal. About three years later, AT&T did a similar thing under a $14 billion contract with Ericsson to remove Nokia's equipment. The loss of T-Mobile US, Nokia's only big remaining client in a market deemed so important to vendor profits, would be catastrophic. There was speculation it could happen.

Announced today, a renewal of the arrangement with what is arguably Nokia's most important customer would therefore have brought considerable relief in the meeting rooms of Nokia's headquarters at Espoo. But the update accompanied a set of first-quarter results that illustrate just why T-Mobile is so critical.

In a tempestuous world of geopolitics, and difficult conditions for network equipment makers generally, Nokia suffered only a 3% dip in sales on a constant-currency basis, with the reported number down 1%, to about €4.4 billion (US$5 billion), compared with the year-earlier quarter. The performance was a tad worse than that of Ericsson, Nokia's mobile-only rival, whose own first-quarter sales were unchanged in constant currencies. Yet the two vendors diverge on the bottom line. While Ericsson's soared 61% year-over-year, Nokia's net profit collapsed, falling from €512 million ($583 million) a year earlier to just €153 million ($174 million).

This was the first quarterly update for Nokia under the leadership of Justin Hotard, a former Intel executive who succeeded Pekka Lundmark in the CEO job at the start of the month. And he will not have been happy to see the share price in Helsinki fall 6.5% shortly after the market opened today. But much of the blame for the profitability upset lies with a project for a mobile operator that happened years before he joined.

Unsettling developments

What Nokia describes as a "settlement fee" paid to that customer of about €120 million ($137 million) tore into the already thin margins at the mobile networks (MN) business group, still Nokia's biggest with its €1.729 billion ($1.97 billion) in sales (beating network infrastructure by €7 million, or about $8 million). While its revenues grew 2% on a constant-currency basis, its operating loss widened from €32 million ($36 million) a year earlier to €152 million ($173 million).

"This was tied to a specific customer project that actually dates back to 2019," said Hotard, answering questions on a call with reporters this morning. "We've done a lot of work at MN in stabilizing our portfolio, making it competitive and addressing some gaps that we've had over the last four to five years. This goes back to a project that actually predates that. We're not disclosing the customer but the key thing to note is that this one-time charge settles the situation in its entirety."

The even bigger problem was a highly unfavorable comparison with the year-earlier quarter at Nokia Technologies, the licensing unit that treats any sales as pure gross profit. The figure for revenues (and, therefore, gross profit) effectively halved year-over-year, to just €369 million ($420 million), because of what Nokia describes as "catch-up" sales it recognized in early 2024. All that was bad news for the bottom line.

Much like Ericsson, Nokia also expects that US President Donald Trump's enthusiasm for tariffs will have some impact, although his increasingly chaotic approach must present forecasters with a near-impossible task. Earlier this month, the Swedish vendor put the cost of tariffs at one percentage point of its gross margin for the current quarter. If that formula was applied to the first quarter, it would equate to about $56.5 million. Nokia's estimate (best guess?) is that tariffs will lower its operating profit by €20 million ($23 million) to €30 million ($34 million) this quarter.

Both companies do much of their manufacturing on US soil but rely on parts from overseas, including various passive components and materials they source from China. "We already have five manufacturing facilities in the US, including two semiconductor manufacturing facilities that we acquired through Infinera," said Hotard when asked on the call about any plans to expand US manufacturing.

Indeed, the recently concluded acquisition of the optical equipment maker has furnished Nokia with a chipmaking facility in California and a packaging one in Pennsylvania. "Our footprint is actually strong, but I think if there are opportunities to strengthen that, and it will help us drive growth in the market, it's one of the things I'll look at," said Hotard.

Mobile still an 'important asset'

Thankfully, that optical business and the other parts of the network infrastructure business group remain high-flyers for Nokia. Reported sales, after the Infinera deal, rose 20% year-over-year, to more than €1.7 billion ($1.9 billion), and grew 11% on a constant-currency basis. The organic increase at optical was about 15%. Nokia is benefiting partly from spending on connectivity between and within data centers bulging with AI chips.

"That is probably the biggest opportunity for growth over the near- and mid-term, but it also takes time for us to fully address and unlock those markets and one of the things that's clear from the Infinera acquisition is their presence in the hyperscaler customer base has given us a much better presence than we enjoyed just as Nokia prior to the acquisition," said Hotard.

The smaller cloud and network services group also had a decent quarter, with reported sales up 4% year-over-year, to €567 million ($645 million). But the settlement charge incurred by mobile means it will be harder to meet forecasts at the upper end, with Nokia targeting an operating profit of between €1.9 billion ($2.2 billion) and €2.4 billion ($2.7 billion) this year. At the midpoint of the range, this would be 18% less than it made last year. "Obviously, this unexpected charge wasn't considered at the time we provided guidance," said Hotard. "It just means we believe it's a little bit harder to get to the higher end of the range than we expected."

The wellbeing and future of mobile networks is still the number-one concern about Nokia. Company restructuring has left Nokia with a workforce of 75,600 employees at the end of last year, down from an average of 86,700 in 2023, and the axe has fallen most heavily on mobile. Yet just as Ericsson has attributed higher profits to doing a bigger share of its work in the US, so Nokia's margins have been hurt by the loss of that AT&T contract.

Despite the AT&T move, however, the mobile business looks to have a much stronger portfolio of products than it did a few years ago. It has revamped its 5G basestation equipment, phasing out more expensive components that had originally hurt its competitiveness. Last month, it claimed to have grown its global footprint by 30,000 mobile sites since the start of 2024, after accounting for all gains and losses. And Hotard continues to describe it as a "very important asset" that remains a focus for Nokia.

"I think it's strategic for us at Nokia. I think it's strategic for our customers – I've certainly heard that from our customers – and I think it is also strategic geopolitically for the western world, both Europe and the United States," he said when asked by Light Reading if further restructuring was needed. "It's clear we've made a ton of very effective investments in stabilizing the portfolio, but we need to continue to invest strategically and that's largely from an R&D standpoint."

Overall R&D spending rose 4% year-over-year for the first quarter, to about €1.1 billion ($1.3 billion), and has been protected from the group-wide cuts. Unlike Ericsson, however, Nokia is not spending much more than it previously did. Between 2021 and 2024, annual spending has risen just 5%, to €4.1 billion ($4.7 billion), of which about $2 billion is thought to go on mobile networks. Over the same period, Ericsson's R&D expenditure has grown 27%, to 53.5 billion Swedish kronor ($5.6 billion) last year.

The T-Mobile renewal could be an important vote of confidence in Nokia's mobile capabilities. It includes "network footprint expansion," implying there is buildout in previously unserved areas, as well as modernization of existing sites. Hotard would not be drawn on further specifics about the deal, but it should take some of the pressure off the new boss now the honeymoon period is over.