Nokia Turnaround Gathers Pace, Shares Rise
Nokia's turnaround has picked up momentum in the first three months of the year, with the Finnish vendor reporting a much slower sales decline than in previous quarters and highlighting encouraging progress at its mobile and fledgling software businesses.
The company's net sales shrank by 4% on a "non-IFRS" basis, to about €5.4 billion ($5.9 billion), and by 6% in constant-currency terms, compared with the year-earlier period. That compares with a decline of about 10% last year and one of 13% in the final quarter of 2016. (See Nokia Upbeat on Turnaround Despite Sales Decline.)
Along with Sweden's Ericsson AB (Nasdaq: ERIC), Nokia Corp. (NYSE: NOK) has been struggling in the face of a declining market for network equipment and aggressive competition from Asian rivals: China's Huawei Technologies Co. Ltd. has continued to grow sales while its Western rivals suffer. (See Huawei's Sales Soar but Profit Growth Grinds to a Halt.)
Nokia last year completed a €15.6 billion ($17 billion, at today's exchange rate) takeover of France's Alcatel-Lucent, giving it important capabilities in the fixed and core network markets, and is now looking to new enterprise and software markets for sales growth. (See Nokia's New Software Unit to 'Redesign' Company and Nokia to Create Standalone Software Biz, Target New Verticals.)
While Nokia had little to say about that strategy in its first-quarter report, it results were characterized by improvements in profitability as well as sales.
Non-IFRS numbers, which strip out some of the costs related to the Alcatel-Lucent (NYSE: ALU) acquisition and are intended to provide a better comparison, show that Nokia's operating margin rose to 6.3%, from 6.1% a year earlier, while net profit was up 46%, to €203 million ($222 million).
On a reported basis, the operating margin improved from -12.9% to -2.4% over that period, with the net loss narrowing from €623 million ($680 million) to €473 million ($516 million).
Investors applauded the performance, with Nokia's share price up more than 6% during early-morning trading in Finland.
The results stood in marked contrast to those of Ericsson, which earlier this week said that first-quarter revenues were 11% lower than in the year-earlier period and complained about the continued weakness in the mobile broadband market. (See Ericsson's Q1 Even Worse Than Feared.)
But mobile broadband was a relative bright spot for Nokia, which said its revenues in this market had stabilized in the first quarter thanks, in particular, to sales of 4.5G products, which are now used by 145 customers, up from 110 in December. (See Nokia Boasts 4.5G Momentum With 110 Deals.)
CEO Rajeev Suri also drew attention to "flat" sales at the critical applications and analytics business following a 13% decline in the fourth quarter of 2016.
While applications and analytics currently accounts for less than 7% of overall revenues, it is from this division that Nokia wants to create a significant "standalone" software business in future.
The improvements also suggest there has been a positive response to recent product initiatives including the launch of a new Internet of Things platform it calls IMPACT. (See Nokia Aims for Big IMPACT in Enterprise IoT.)
But it was not entirely good news in the first quarter, with Suri indicating that "some challenges remain" in a statement that struck a measured tone and urged cautious optimism about the year ahead.
While the mobile networks business was the star of the show, with revenues down just 1%, to €3.1 billion ($3.4 billion), sales of fixed-line products were a big disappointment, tumbling by nearly a fifth to just €501 million ($547 million).
Suri said the unit had been "impacted by several large deployments coming to an end."
The IP and optical networks business also registered a sales decline of 14%, to €945 million ($1 billion), after seeing a decline of 12% in the fourth quarter.
In this area, in particular, Nokia is attempting to drum up interest outside its traditional telecom market, catering to large Internet companies and organizations in other "adjacent" vertical sectors. It has also hinted at the launch of new products that will be aimed at the Internet companies in the months ahead.
Despite those pressure points, Nokia was able to confirm its previous guidance for 2017: It expects network sales, which account for more than 90% of the total, to shrink by about 2.2% -- the same rate of decline it is forecasting for its main addressable market -- and is guiding for an operating margin at the networks business of between 8% and 10%. (See Nokia Forecasts Sales Decline in 2017, Shares Fall.)
Excluding the small Nokia Technologies business, Nokia also expects to generate €1.2 billion ($1.3 billion) in cost savings next year, compared with non-IFRS operating costs at the combined Nokia and Alcatel-Lucent businesses in 2015.
— Iain Morris, , News Editor, Light Reading