Nokia CEO Rajeev Suri has said the Finnish vendor's networks business experienced a "terrific rebound" during the second quarter but warned investors that conditions may worsen in the third quarter amid fierce price-based competition.
Suri's comments came after Nokia Networks -- which generates 85% of Nokia Corp. (NYSE: NOK)'s revenues -- earlier today reported a 6% year-on-year increase in sales, to about €2.7 billion (US$3 billion), and saw its operating margin rise from 11% to 11.5% over the same period.
Along with European rivals Alcatel-Lucent (NYSE: ALU) and Ericsson AB (Nasdaq: ERIC), Nokia continues to benefit from favorable exchange-rate effects and would have seen a 4% fall in revenues at the networks business on a constant-currency basis.
Even so, this compares favorably with the organic second-quarter revenue decline of 9% reported by Alcatel-Lucent, which Nokia is currently in the process of acquiring in a €15.6 billion ($17 billion) deal. (See AlcaLu Grows Profits Ahead of Nokia Deal, Nokia Makes €15.6B Bid for Alcatel-Lucent, Nokia & Alcatel-Lucent: What's Going On? and Nokia + AlcaLu: What the Analysts Say.)
It also looks good next to the revenue decline of 6%, "adjusted for comparable units and currency," that Ericsson reported earlier this month. (See Ericsson's Stock Rises on Q2 Margin Improvements.)
Speaking on an earnings call earlier today, Suri told analysts that Nokia remained on track to achieve its full-year targets despite the weak third-quarter outlook.
The company has been guiding for a full-year operating margin at Nokia Networks of between 8% and 11% and has recently indicated the figure will probably be "around the midpoint" of this range.
It also expects growth in revenues at Nokia Networks but has not issued any specific top-line guidance.
"Conditions are challenging and we need to take out costs wherever we can," said Suri. "We are working to mitigate the impact unlike others yet to acknowledge that market conditions have changed and we'll be better prepared down the road."
Margins appeared to improve at the networks business thanks partly to what Suri called a "mix shift," with software accounting for a higher proportion of sales than in the first quarter of the year.
Nokia had also complained in the first quarter about the impact of strategic deals allowing it to enter China's 4G market, suggesting it had slashed prices to secure contracts. (See Nokia Slumps on Networks Malaise and Forget 3G: China Mobile Is a 4G King.)
Its margin performance was further helped by an increase in the share of revenues generated by global services, up to 49% of network revenues from about 46% in the first quarter.
Offering more color on the outlook for Nokia Networks, Suri said the global equipment market outside China was "possibly declining this year" while noting that European suppliers have struggled to make inroads into China because of competition from national players, which include Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763).
Nevertheless, operating margins look far healthier at Nokia Networks than at either Alcatel-Lucent or Ericsson, which reported second-quarter figures of 5.1% and 5.9% respectively.
Answering questions from analysts, Suri indicated there was further scope for efficiency gains through R&D transformation and productivity improvements. "We continue to have a laser-like focus on costs and we won't relax in the coming quarters," he said. "The drive will come from more automation of the way we do business."
Suri also provided an encouraging update on progress towards a merger with Alcatel-Lucent, noting that Nokia has already secured regulatory approvals in Europe and the US and is currently in discussions with Chinese authorities about the transaction.
Nokia still expects to finalize the takeover -- which will create a company as big as Sweden's Ericsson in revenue terms -- in the first half of 2016.
Nokia's share price was trading nearly 6% higher on the New York Stock Exchange during Thursday morning trading.
— Iain Morris, , News Editor, Light Reading