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Nokia, AlcaLu Steady Ship on Costs Before Tie-Up

Nokia has reported a troubling slowdown in sales for the final three months of 2015, despite a sharp increase in profits, and warned of further turbulence in the first quarter of 2016 -- when its numbers will also include the Alcatel-Lucent business it recently acquired.

Nokia's revenues fell by 3% in constant-currency terms, compared with the same period in 2014, but rose by 3% on a reported basis, to €3.6 billion (US$4.1 billion).

"We do expect some market headwinds in 2016 as 4G/LTE rollouts in China and some other markets start to slow," said Nokia Corp. (NYSE: NOK) CEO Rajeev Suri in a published statement. "The first quarter, in particular, looks quite challenging as customers assess their capex plans in light of increasing macro-economic uncertainty."

The sales figures appeared to miss analyst forecasts. Nokia's share price dropped by around 3.5% during morning trading in Helsinki but had staged a partial recovery by lunchtime, when it was down just 1%.

While the revenue picture looked messy, the Finnish vendor has continued to make good progress on cutting costs and reported sharp improvements across various profitability metrics.

The vendor's gross margin rose to 46.4%, from 40.8% in the year-earlier quarter, while its operating margin increased to 20.3% from 14.3% over the same period. Nokia's net profit grew by 54%, to €499 million ($565 million), on a year-on-year basis.

Table 1: Nokia's Headline Figures (€M)

Q4 2015 Q4 2014 Change
Net sales 3,609 3,510 3%
-- Nokia Networks 3,210 3,365 -5%
-- Nokia Technologies 403 149 170%
Gross margin 46.4% 40.8% 5.6 percentage points
Operating profit 734 503 46%
-- Nokia Networks 468 470 0%
-- Nokia Technologies 322 77 318%
-- Group Common Functions -56 -43 -
Operating margin 20.3% 14.3% 6 percentage points
Profit 499 325 54%
Source: Nokia.

The operating margin figure compares very favorably with the 15% recently reported by rival Ericsson AB (Nasdaq: ERIC), which is also trying to slash costs amid signs of sales pressure. (See {docink 720645}.)

But a big challenge for Nokia will be to maintain this kind of margin as it works on integrating Alcatel-Lucent (NYSE: ALU), which it eventually acquired in a €15.6 billion ($17.7 billion) deal last month. (See Finn de Si่cle for Alcatel-Lucent.)

In its earnings statement, Nokia said it would hold 91.25% of the share capital of Alcatel-Lucent "following the settlement of the securities tendered into the reopened offer, which is expected to occur on February 12."

To the apparent consternation of analysts, Nokia declined to provide any firm guidance for the 2016 financial year in its earnings release, saying it did not believe this would be "appropriate" in light of its recent acquisition of Alcatel-Lucent and that it would provide detailed targets when reporting figures for the first quarter of 2016.

Nevertheless, Suri expects to see a decline in the wireless infrastructure market in 2016, including a "greater than normal" seasonal decline in the first quarter.

The forecast of a slowdown in China may be a particular concern for investors: thanks to heavy spending on 4G network rollout by China's operators, Nokia reported a 17% year-on-year increase in revenues from Greater China in the fourth quarter, to €482 million ($545 million) -- making it Nokia's best-performing geographical market.


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Nokia believes the takeover of Alcatel-Lucent will enable it to better compete against Ericsson and Huawei Technologies Co. Ltd. , supplying a much broader portfolio of fixed, mobile and IP-based products.

Following the integration of Alcatel-Lucent, Nokia will be a similar size to Ericsson in revenue terms. The Finnish vendor also expects to realize net operating cost synergies of €900 million ($1 billion) in 2018, compared with combined operating costs for the two companies in 2015.

Reporting its own last set of quarterly results earlier today, Alcatel-Lucent saw revenues increase by 4% in constant-currency terms and by 13% on a reported basis, to around €4.2 billion ($4.8 billion), compared with the final quarter of 2014.

Alcatel-Lucent claimed the Shift Plan -- its own efficiency program -- had easily beaten expectations, generating fixed cost savings of more than €1 billion ($1.1 billion) against an original target of €950 million ($1.07 billion).

Its operating margin rose to 13.5% in the fourth quarter, from 7.7% a year earlier, with net income soaring from €271 million ($307 million) to €659 million ($746 million) over the same period. Alcatel-Lucent was also able to register a full-year profit of €361 million ($408 million), having slumped to a loss of €118 million ($133 million) in 2014.

The intense focus on the development and sale of next-generation networking products appears to have paid dividends for the French supplier, with those next-generation technologies accounting for 77% of revenues in 2015, compared with just a half in 2012.

"The Group has now embarked on the next chapter of its story with Nokia and will continue to deliver value as part of a global leader in technology and services for an IP connected world," said Chairman and CEO Philippe Camus in a company statement.

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

[email protected] 2/11/2016 | 8:39:22 AM
Calm before the storm? IT would have been disastrous if the two parties had ended 2015 ina a bad state. AlcaLu was still benefitting from the cost-cutting strategy that M Combes implemented and Nokia, while revenues aren't growing in Networks, has really turned a consisten corner with its margins.

The question is - can the Nokia exec team maintain that with ALU on board? I think we'll find out by the end of the year.

Now we are into a three-way battle - Nokalu v Ciscosson v Huawei for some very big bucks.
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