Shares in the Finnish equipment maker fell sharply in early-hours trading after its main networks business floundered in the first quarter.

Iain Morris, International Editor

April 30, 2015

6 Min Read
Nokia Slumps on Networks Malaise

Nokia has expressed dissatisfaction with the performance of its main networks business after the unit reported a 61% fall in operating profit for the first three months of the year and saw its margin shrink to 3.2% from 9.3% in the year-earlier period.

The decline forced the Finnish equipment maker to revise its guidance for the full year. It now expects the operating margin at Nokia Networks to be "around the midpoint" of the 8-11% range it had previously issued.

The earnings update sent Nokia Corp. (NYSE: NOK)'s share price tumbling by 9.5% in Helsinki to €6.15 during early-hours trading.

Nokia hopes a recently announced €15.6 billion (US$17.5 billion) takeover of rival Alcatel-Lucent (NYSE: ALU) will give it the scale to compete more effectively against Sweden's Ericsson AB (Nasdaq: ERIC) and China's Huawei Technologies Co. Ltd. , the giants of the telecom equipment market, and held "more challenging market conditions" partly responsible for the first-quarter setback at Nokia Networks. (See Nokia Makes €15.6B Bid for Alcatel-Lucent, Nokia & Alcatel-Lucent: What's Going On? and Eurobites: Nokia Defends French Jobs Pledge.)

Nokia also blamed the impact of strategic entry deals, lower software sales, foreign exchange movements and higher technology investments for the recent networks malaise, although CEO Rajeev Suri said he expected some of the negative factors to ease in the second half of the year.

Thanks to accounting adjustments and strong performances at its much smaller mapping and licensing businesses, the company swung to a net profit of €177 million, from a loss of €239 million ($369 million) in the first three months of 2014, with total sales rising by 20%, to €3.2 billion ($3.6 billion), over the same period.

Q1 2015

Q1 2014

YoY change

Net sales

3,196

2,664

20%

−Nokia Networks

2,673

2,328

15%

−HERE

261

209

25%

−Nokia Technologies

266

131

103%

Gross margin % (non-IFRS)

42.5%

45.6%

-3.1 percentage points

Operating profit (non-IFRS)

265

305

-13%

−Nokia Networks

85

216

-61%

−HERE

19

10

90%

−Nokia Technologies

193

86

124%

−Group common functions

-32

-8

N/A

Operating margin % (non-IFRS)

8.3%

11.4%

-3.1 percentage points

Profit (non-IFRS)

200

172

16%

Profit from continuing operations

181

110

65%

Net income

177

-239

N/A

Source: Nokia

Although reported sales at Nokia Networks were 15% higher than in the year-earlier period, revenues increased by only 5% on a constant-currency basis thanks largely to the performance of its Global Services unit. Rising sales of radio technologies, and especially LTE, were partly offset by a decline in the core networking business.

Want to know more about 4G LTE? Check out our dedicated 4G LTE content channel here on Light Reading.

Nokia Networks also benefited from its takeover in August last year of US network services provider SAC Wireless, which fueled year-on-year growth of 47% in revenues from North America. Network sales rose in all other geographies except Europe -- its second-biggest regional market after the Asia-Pacific -- and Latin America, where they fell by 2% and 5% respectively.

Revenues at HERE, the mapping division, were bolstered by higher sales to automotive customers and dealings with Microsoft Corp. (Nasdaq: MSFT), which has become a more "significant licensee" of Nokia's technology since completing its takeover of the Finnish player's devices business in April 2014.

HERE's performance should help Nokia attract interest from prospective buyers. The company announced its intention to sell the unit and focus more heavily on the networks market at the same time it unveiled details of its bid for Alcatel-Lucent.

Last week it was reported by Bloomberg to have approached organizations including Apple Inc. (Nasdaq: AAPL), Facebook , Amazon.com Inc. (Nasdaq: AMZN) and China's Alibaba Group about a possible deal, and apparently hopes to generate at least €3 billion ($3.4 billion) from a HERE sale. (See Eurobites: Nokia's HERE Locates Potential Buyers.)

Meanwhile, the Technologies unit -- which looks after intellectual property and whose revenue potential remains a constant source of speculation among industry observers -- more than doubled net sales and operating profits compared with the year-earlier period.

The increase was partly related to Nokia's licensing relationship with Microsoft, which came under the spotlight earlier this week after a US court reportedly ruled that Microsoft's phones have been illegally using technology patented by a company called InterDigital Inc. (Nasdaq: IDCC).

That patents battle is the natural successor to an earlier dispute between InterDigital and Nokia.

Nokia's earnings announcement comes several days after Ericsson blamed a slowdown in North America's mobile broadband market for a 14% year-on-year fall in its own first-quarter net income. (See Ericsson Sinks on North American Slowdown.)

The Swedish company's share price took a similar beating to Nokia's in the hours after its announcement and has continued to fall on the Stockholm exchange during the past few days.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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