Nokia’s Margins Rise as Revenue Slump Slows

Nokia's Margins Rise as Revenue Slump Slows

Nokia (NYSE: NOK) reported its first-quarter results before the market opened on April 27. Total revenue declined, but at a slower pace compared to the fourth quarter. Non-international financial reporting standards (non-IFRS) profit soared, driven by cost-cutting and increased margins for the networks business. The networks business will continue to decline during the rest of the year, but Nokia expects margins to keep moving higher. Here’s what investors need to know about Nokia’s first-quarter results.

Nokia results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Growth

Sales

5.34 billion euros

5.62 billion euros

(4%)

Profit

203 million euros

139 million euros

46%

Earnings per share

0.03 euros

0.03 euros

0%

Data source: Nokia. All figures non-IFRS.

Image source: Nokia.

What happened with Nokia this quarter?

  • Nokia’s networks revenue slumped 6% year over year to 4.9 billion euros; it was down 7% adjusted for currency. Ultra broadband networks revenue fell 4%, while IP networks and applications revenue dropped 10%.
  • Within ultra broadband networks, mobile networks revenue declined by 1% to 3.1 billion euros, while fixed networks revenue plunged 19% to 501 million euros.
  • Networks gross margin rose 90 basis points year over year to 39.5%, while operating margin rose 10 basis points to 6.6%.
  • Nokia technologies revenue grew by 25% year over year to 247 million euros. Gross margin fell 430 basis points to 94.7%, while operating margin fell 650 basis points to 47%.
  • HMD Global, Nokia’s exclusive brand licensee for mobile phones and tablets, will begin shipping three Nokia-branded smartphones during the second quarter. Nokia will receive a royalty on each unit sold.
  • On Feb. 9, Nokia announced that it was acquiring Comptel Corp. as part of its plan to build a stand-alone software business.

Nokia provided the following pieces of guidance for investors:

  • Annual cost savings of 1.2 billion euros from Nokia’s merger with Alcatel-Lucent by 2018, unchanged from previous guidance.
  • The networks business is expected to decline at a low-single-digit rate this year, in line with the primary addressable market. Operating margin is expected between 8% and 10%.
  • Nokia again provided no guidance for the technologies segment due to risks and uncertainties determining the timing and value of licensing agreements.

What management had to say

Nokia CEO Rajeev Suri summed up the quarter:

Nokia’s first quarter 2017 results demonstrated our improving business momentum, even if some challenges remain. We slowed the rate of topline decline and generated healthy orders in what is typically a seasonally weak quarter for us. We also continued to see expansion of cross-selling across our full portfolio, delivered excellent gross margins and improved group-level profitability.

Suri is optimistic about Nokia’s performance in 2017: “Overall, given Nokia’s performance in the first quarter, I am optimistic about the year ahead, even if cautiously so. Our competitive position is strong, we are executing well, and, as a result, we are able to confirm our guidance for full-year 2017.”

Nokia’s guidance for the full year remains unchanged. The networks business is still in decline, but both gross and operating margins rose during the first quarter, and Nokia expects further improvements in profitability as the year goes on. Nokia’s cost savings program is helping to drive the bottom line higher, and that remains on track to be completed by the end of 2018.

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