Nokia Earnings Preview: Networks In Focus
Nokia (NYSE:NOK) is scheduled to release its Q3 results on Thursday, October 23. In the previous quarter, the company beat market estimates on the back of robust global LTE spending and a continued high level of profitability in its Networks business. Although Nokia continued to see its networking services revenues shrink on the back of divestitures and contract exits in unprofitable regions, this impact was somewhat offset by healthy demand for mobile broadband infrastructure among carriers, especially in regions such as China, where the transition to 4G LTE is underway. Even though overall sales declined in high single-digits on a year-over-year (y-o-y) basis, they grew in double-digits over the previous quarter. On the cost side, the company reported an operating profit of $378 million and operating margin of 11% for Q2, significantly above market expectations. Looking at its progress in maintaining profitability along with top-line gains, the company raised its operating margin estimate for Networks to be slightly above the higher end of its long-term target of 5-10%.
When Nokia comes out with its third quarter results, we expect its overall sales decline to improve from last quarter’s figure of about 10%. The company has built a strong pipeline of orders on a number of recent contract wins in Europe, such as Everything Everywhere and Vodafone, which should help bolster sales. A revenue boost is expected in the U.S and China as well, with carriers such as T-Mobile (NYSE:TMUS), Sprint (NYSE:S), China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA) increasing their network spending. However, lower margin LTE deals in China may put a dent in the company’s operating profits for the quarter.
Our $8 price estimate for Nokia is in line with the current market price.
See our complete analysis for Nokia stock here
Networks To Drive Growth
The sale of the handset business made Networks (formerly NSN) the biggest contributor to Nokia’s value, accounting for almost half of its total value by our estimates. Before being promoted as Nokia’s CEO, Rajeev Suri headed the Networks division for the company. At the helm of NSN, Suri is credited with turning the division around to sustained profitability on the back of a big restructuring program that cut its operating expenses by EUR 1.35 billion and increased its focus on mobile broadband. However, the transition took a toll on Nokia’s top line, which declined by 17% y-o-y in the first quarter this year as the company exited unprofitable service contracts, primarily in EMEA and Latin America.
In the second quarter, the company was able to reverse much of its top-line decline by banking on higher LTE spending across geographies, especially Greater China and Asia-Pacific. Excluding the impact of divestitures, contract exits and currency fluctuations, Nokia’s Q2 Networks revenues actually grew by 1% y-o-y – an improvement over the decline of 6% in the previous quarter and 12% in Q4 2013.
Going forward, rising 4G LTE deployment activity should help improve revenues further. Nokia has done well in winning LTE contracts with China Mobile and China Telecom, and has emerged as one of the leading foreign players in the Chinese LTE buildout. Although European sales have been slow to recover, the deal pipeline looks strong as carrier spending returns amid receding macroeconomic uncertainty. In Europe, Nokia won two large LTE contracts with Everything Everywhere and Vodafone, which should help stabilize revenues in the third and fourth quarters this year. The company’s contract win at Sprint is also likely to boost revenues in the second half, with the carrier likely to splurge on its Spark program now that its initial LTE layout is complete.
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