Wireless Weakness Dents Nokia Sales, Outlook

Nokia has witnessed a troubling drop in sales during its first full quarter since the acquisition of rival Alcatel-Lucent and warned that revenues will decline this year on a like-for-like basis.

The €15.6 billion (US$17.8 billion) takeover of Alcatel-Lucent (NYSE: ALU) was aimed at helping Nokia Corp. (NYSE: NOK) stand up to chief rivals Ericsson AB (Nasdaq: ERIC) and Huawei Technologies Co. Ltd. in the consolidating equipment market, but is off to an inauspicious start on the sales front. (See Finn de Siècle for Alcatel-Lucent.)

Revenues in the January-to-March quarter fell by 9%, to €5.6 billion ($6.4 billion), compared with combined company revenues in the year-earlier period. Nokia also swung to a net loss of €513 million ($584 million), having reported a profit of €177 million ($202 million) a year earlier, because of costs related to the Alcatel-Lucent transaction.

Blaming weakness in the mobile networks business for the sales upset and disappointing outlook, the Finnish vendor also raised its target for annual cost savings to more than €900 million ($1 billion) by 2018 -- having previously guided for savings of around €900 million ($1 billion).

Much of those savings are likely to be found at the former Alcatel-Lucent mobile business, which overlaps considerably with Nokia's legacy product lines. Nokia already announced job cuts as part of its cost-cutting program and revealed in April that it was in negotiations to axe 1,300 jobs in Finland, where it had nearly 7,000 employees before its takeover of Alcatel-Lucent. (See Nokia to Slash Jobs Following AlcaLu Merger.)

In a statement accompanying the first-quarter earnings release, CEO Rajeev Suri said Nokia, which has about 104,000 employees globally, had also started to make staffing cuts in the US and "several other countries." It has also sold off a number of facilities and is due to close as many as 30 sites in the current quarter.

Efficiency initiatives within Nokia and Alcatel-Lucent have already delivered some benefits for the new-look company, which reported a gross margin of 39.4% and an operating margin of 6.2% in the first quarter.

The comparable figures at a combination of the two companies last year would have been 36.9% and 4.5%, while Sweden's Ericsson -- which is going through a radical restructuring of its own -- reported a gross margin of 33.3% and an operating margin of 6.7% in first-quarter results published last month. (See Ericsson Restructures as Sales, Gross Margins Falter in Q1.)

Nokia shares had dipped by around 2% in Helsinki at the time of publication but would probably have fallen more sharply were it not for the encouraging performance on margins.

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At the Nokia Networks business, which accounted for 92% of first-quarter revenues, Nokia is aiming for an operating margin of 7% in 2016. But the company acknowledged that efforts to integrate Alcatel-Lucent would have an impact on sales this year.

Nokia described the outlook for the overall "capex environment" in its addressable market as "flattish" in 2016 but expects the wireless infrastructure sector to decline.

"While our revenue decline was disappointing, the shortfall was largely driven by mobile networks, where the challenging environment is not a surprise," said Suri in his statement. "We noted in our fourth-quarter earnings release that we expected some market headwinds in 2016 in the wireless sector and we continue to hold that view today."

Revenues from mobile networks came in at €3.1 billion ($3.5 billion) in the first quarter, 15% less than at a combined Nokia and Alcatel-Lucent in the year-earlier period, while those from fixed were up 13%, to €613 million ($698 million).

At the new IP networks and applications division, which mainly comprises products and expertise from the former Alcatel-Lucent business, net sales edged up 1%, to €1.1 billion ($1.3 billion), while gross profits rose 15%, to €646 million ($735 million).

Geographically, Nokia Networks witnessed revenue declines in every region bar Latin America -- which accounted for just 7% of the total -- including a 17% drop in the large North American market, where the business made 30% of its total sales. Besides complaining about market conditions and integration costs, Nokia also identified "competitive industry dynamics" as a source of concern.

Its guidance comes several weeks after Michael Genovese, an analyst with MKM Partners, predicted that Nokia would generate about €23.22 billion ($26.4 billion) in sales this year -- 12% less than an earlier forecast -- due to various challenges. (See Eurobites: Nokia Sales to Hit $26.5B in 2016 – Analyst.)

Noting the overlap between wireless access products and a weak market outlook, Genovese also said that "competitors will aggressively target Nokia during the merger integration process."

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

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