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.

Table 1: Headline Figures (€M)

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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