Nokia (NOK) is reportedly exploring its options. If it is, it's hard to blame the company, given what its demand environment has looked like lately.
On Thursday, Bloomberg (citing multiple sources) reported that Nokia is "working with advisers to consider alternatives ranging from potential asset sales to mergers." One of its sources added that other options, such as "shifting investments and making balance-sheet adjustments," are also on the table.
Following Bloomberg's report, Reuters reported hearing from a source that there was no truth to Bloomberg's report. Nokia, for its part, declined to comment on the report.
Only time will tell whether Nokia carries out a big M&A transaction of some kind. And it's worth noting that a deal with mobile infrastructure rival Ericsson (ERIC) -- the subject of some speculation after Attorney General Bill Barr said the U.S. should consider taking controlling stakes in Nokia and Ericsson to put them on better footing against Chinese rivals -- would probably face intense antitrust scrutiny.
But all the same, considering what telecom equipment firms and their chip suppliers have signaled in recent months about telecom capex in general, and mobile infrastructure capex in particular, Nokia and its peers have reasons to explore M&A deals that could yield cost synergies, broader product lines and more leverage with telcos and suppliers.
Nokia's revenue fell 1% in constant currency (CC) in Q4, and the company has forecast that (excluding China, where Nokia is lowering its exposure amid profit challenges) its "primary addressable market" will be roughly flat on a constant currency basis this year. The company added that it expects its Networks (hardware/services) and Software segments to perform roughly in-line with its primary addressable market.
Other major telecom equipment suppliers generally aren't doing much, if any, better. Ericsson's revenue rose 1% in CC in Q4. Juniper Networks (JNPR) saw its service provider revenue drop 5% annually in Q4, while rival Cisco Systems (CSCO) , which has been trying to lower its hardware dependence, reported a 21% January quarter drop in its service provider orders. Ciena (CIEN) is doing relatively well; its revenue rose 8% in the company's October quarter, aided by strong growth for its Packet Networking (switch/router) offerings.
One big near-term headwind for telecom equipment suppliers: Mobile carriers that are seeing little or no service revenue growth, and which are unsure about 5G's revenue impact, are for now choosing to move cautiously with their 5G rollouts. The 2020 capex budgets that have been shared by the likes of AT&T (T) and Verizon (VZ) drive this home (T-Mobile US (TMUS) , which has promised to make big 5G investments should its merger with Sprint (S) close, could prove a relative bright spot).
It's possible that mobile carriers will eventually move more aggressively, should 5G's technical abilities give carriers reason to think it can open large new revenue streams in areas such as IoT services, home broadband services and dedicated enterprise network capacity. But at the same time, it isn't clear right now that 5G will allow carriers to produce meaningfully more revenue from smartphone users than what they get right now, and that seems to be leading them to tread carefully.
Throw in stiff competition in some international markets from China's Huawei and ZTE, and companies like Nokia, Ericsson and Juniper (as well as some smaller peers) might wager that M&A gives them an easier path to growing their bottom lines than trying to convince telcos to spend more on their products and services.
