Nokia's Outlook Worsens As Revenue Slumps

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Nokia (NYSE: NOK) reported its third-quarter results before the market opened on Oct. 26. A steep revenue decline was driven by weakness in the network's business, with a strong performance from the technologies segment unable to pick up the slack. Profits nearly doubled, but the company again lowered its outlook for the full year, citing challenging market conditions and increased competition. Here's what investors need to know about Nokia's third-quarter results.

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Nokia results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Growth

Sales

5.54 billion euros

5.96 billion euros

(7%)

Profit

516 million euros

264 million euros

95.5%

Earnings per share

0.09 euros

0.04 euros

125%

What happened with Nokia this quarter?

  • Nokia's networks revenue declined by 9% year over year to 4.82 billion euros. Within the networks segment, ultra broadband-networks revenue slumped 17% to 2.10 billion euros, global services revenue fell 2% to 1.36 billion euros, and IP networks and applications revenue dropped 4% to 1.37 billion euros.
  • Networks gross margin increased by 110 basis points year over year to 38.6%, while operating margin decreased by 130 basis points to 6.9%.
  • Nokia technologies revenue was up 73% year over year to 390 million euros. Gross margin was 97.9%, up 130 basis points, while operating margin was 80.7%, up 1,670 basis points.
  • Revenue from an arbitration agreement contributed 180 million euros to the technology segment during the third quarter, accounting for some of its growth.
  • HMD Global, the exclusive licensee for the Nokia brand for phones and tablets, launched the flagship Nokia 8 smartphone during the third quarter.

Nokia provided the following guidance for investors:

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  • Annual cost savings of 1.2 billion euros from Nokia's merger with Alcatel-Lucent by 2018. That number is unchanged from previous guidance.
  • Nokia expects the networks business to decline along with its addressable market this year. The company stated that it expects market conditions to be slightly more challenging than previously anticipated. The company expects a 4% to 5% decline in its addressable market, worse than previous guidance calling for a 3% to 5% decline.
  • Nokia also expects its addressable market to shrink by 2% to 5% in 2018.
  • Increased competition in China is expected to hurt results, particularly in the fourth quarter of 2017.
  • The networks business is still expected to produce an operating margin of between 8% and 10% in 2017.
  • No guidance was given for the technology segment.

What management had to say

Despite the weakness in Nokia's networks business, CEO Rajeev Suri found some silver linings:

We also saw strength in many parts of our Networks business in the quarter. On the sales side, we saw constant currency year-on-year growth in Global Services and IP Routing as well as our Middle East and Africa, and Asia-Pacific regions. Orders were up in many areas, including Applications & Analytics, which logged its fifth consecutive quarter of order growth in Q3, showing the progress we are making in our strategy to build a strong, stand-alone software business.

Suri described some of the problems facing the business:

In terms of the issues we are facing in Mobile Networks, I have noted in previous quarters that the R&D team in this business group has faced an extraordinarily high workload. Given this situation, we have seen some issues with the time taken to converge some products that have, unfortunately, impacted a small number of customers. As a result, Mobile Networks has experienced both revenue pressure and an increase in expected network equipment swap costs.

Looking forward

While Nokia had a rough third quarter from a revenue perspective, its profit continues to grow at a breakneck pace. That growth rate isn't sustainable, but it provides some evidence that Nokia can maintain its margins even in a difficult market environment.

Nokia's outlook for 2017 worsened slightly, and it expects competition to hurt its results in the fourth quarter. It also expects continued revenue declines in 2018 for its core networks business. But Suri is optimistic that the company is well positioned for the eventual roll-out of 5G networks.

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