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Nokia reconsidering its role in China's 5G rollout

Nokia Corp. executives said the company is weighing a pullback from bidding on 5G contracts in China amid intense competition that is driving down profit margins for the region.

Speaking on an Oct. 24 earnings call, CEO Rajeev Suri said it would take years for 5G contracts in China to reach profitability. Given that time frame, the company may opt not to bid on certain contracts.

In the third quarter, Nokia's net sales in Greater China fell 21% year over year to €425 million from €540 million. The region accounted for 8% of the company's third-quarter net sales.

While China is expected to account for a large portion of global 5G contracts, Suri stressed that Nokia does not need to pursue low-margin business.

Earlier in the call, the CEO said the company will conduct a review of certain contracts for their commercial viability, which "could result in some country exits." Nokia is also working to reduce the cost of producing 5G products, Suri said.

Nokia's total net sales for the third quarter were €5.69 billion, up 4% year over year from €5.46 billion.

North America sales rose 7% year over year to €1.71 billion from €1.59 billion. The growth was less than executives had hoped given that the U.S. government's ban on Chinese 5G equipment provider Huawei Technologies was expected to benefit the Chinese company's rivals, including Nokia.

Nokia's operating profit for the quarter totaled €264 million, or 1 euro cent per share, compared to a loss of €54 million, or 2 cents per share, a year earlier.

Fixed access was one disappointing segment, Suri said, noting that the transition from copper networks to fiber broadband has impacted Nokia's market share. "We have traditionally had a strong position in copper ... but slightly weaker in fiber," he said. Net sales for fixed access fell 7% year over year, or 10% on a constant currency basis.

Nokia is lowering its full-year 2019 and full-year 2020 outlook "due to margin pressure and additional investment needs." The company in July raised its full-year 2019 outlook on solid second-quarter 5G sales. It won nine commercial 5G contracts in the June quarter, bringing the company's total to 45. That has since grown to 48. Fifteen of those contracts are live, including for Sprint and Verizon in the U.S.

Following the third-quarter results, Nokia said it expected "somewhat negative" recurring free cash flow for the full year, down from previous guidance of "slightly positive." It also lowered its expectations for full-year non-IFRS operating margin to 8.5%, plus or minus 1 percentage point, from a prior range of 9% to 12%. It also lowered its full-year non-IFRS diluted EPS guidance to 21 cents, plus or minus 3 cents, compared to prior guidance of 25 cents to 29 cents per share.

Executives said Nokia will not pay a dividend in the third and fourth quarters as it aims to increase investment in 5G and other strategic areas, such as chip technologies, and to strengthen its cash position.