Nokia and Ericsson slump as patent battles hit margins

Companies expect other countries such as India to be the main growth driver in 2023

Telecoms makers Nokia and Ericsson were among the worst performers in Europe on Thursday, battered by ongoing patent battles that are cutting into profit margins and offsetting strong demand for 5G equipment.

While both companies’ revenue beat expectations thanks to the rollout of 5G, delayed royalty payments meant their headline earnings missed analysts’ expectations.

Ericsson shares fell 12% and were the worst performers in the STOXX 600, while Nokia shares fell almost 5% and were among the worst performers.

Since the initial rollout stages of large projects like 5G tend to have lower margins, telcos depend on their high-margin patent royalty business to boost profits. Companies like Ericsson charge $2.50 to $5 for every 5G phone sold and are under pressure to negotiate new contracts.

Ericsson’s quarterly royalty revenue fell by 1.1 billion Swedish crowns ($98.24 million) as it battled with the likes of Apple over patents. Nokia’s patent revenue fell by 62 million euros ($60.67 million), mainly because of the dispute with Oppo and Vivo.

Nokia’s gross margin fell to 40.1% from 40.7%, slightly better than Ericsson’s decline to 41.4% from 44%.

“We are very confident in our patent portfolio and are in no rush to close the deal … we will make sure we get a good win-win deal,” Ericsson CFO Carl Mellander said in an interview.

However, when a deal is reached, all outstanding royalties are paid in a lump sum.

While the companies continue to benefit from higher spending on 5G equipment, both warned of a cooling off in their core market, North America.

“The North American market has grown very rapidly this year and it is reasonable to expect some normalization of the market,” Nokia CEO Pekka Lundmark said in an interview.

“However, it is too early for detailed estimates as operators have not yet announced their investment plans for next year,” he said.

Companies expect other countries such as India to be the main growth driver in 2023.

India’s Bharti Airtel and Reliance Jio launched 5G services in the world’s second most populous country earlier this month, choosing Nokia and Ericsson as equipment suppliers.

Analysts at Jefferies said a decline in high-margin markets such as the US and growth in low-margin markets such as India will increase margin pressures in 2023.

Both companies are trying to reduce the cost of spending on research at a time of chip shortages and supply chain disruptions due to the Russia-Ukraine war and chip shortages.

They plan to leave Russia by the end of the year.

In addition to the wide-ranging challenges, Ericsson is also grappling with a bribery investigation in Iraq and investor anger over improper disclosures.

The company is under investigation by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) for its past conduct in Iraq. It said it is working with both agencies and the outcome cannot yet be assessed.