Nokia’s Q3 Earnings Beat Estimates On Solid Growth Across Divisions

Nokia (NYSE:NOK) announced solid Q3 2014 results on Thursday, October 27, as the company easily beat market estimates on the back of robust global LTE spending and improved profitability in its Networks business. Networks sales increased by an impressive 15% year-over-year (y-o-y) on a constant currency basis to EUR 2.94 billion ($3.72 billion), driven by soaring Mobile Broadband sales which offset weakness in Global Services. In other businesses, global mapping division HERE saw net sales grow 12% y-o-y to EUR 236 million ($299 million), and Intellectual Property (IP) licensing division Nokia Technologies reported a 9% y-o-y increase in sales to EUR 152 million ($192 million) on account of higher income from certain licensees including Microsoft (NASDAQ:MSFT). ^{[1] [2] [3]}

Driven by growth across divisions, Nokia’s overall operational sales grew 15% y-o-y to EUR 3.32 billion ($4.2 billion) in the quarter, excluding a 2% negative impact from currency fluctuation. This was significantly above analyst forecasts of EUR 3.02 billion ($3.82 billion), compiled by Thomson Reuters. On the cost side, adjusted operating margin (non-IFRS) improved by 200 basis points over the prior year quarter and 190 basis points sequentially to 13.7%, owing to some high-margin LTE deployments in the quarter. 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 11%, compared to its earlier guidance of 5-10%.

Our $8 price estimate for Nokia is about in line with the current market price.

See our complete analysis for Nokia stock here

Networks Drives Sales, Profitability

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% year-over-year 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 reversed much of its top line losses 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.

Banking on new contract wins amid rising global LTE spending, the company changed gears in the third quarter with robust 15% y-o-y top line gains in the Networks division, driven by 33% y-o-y sales growth in Mobile Broadband. Networks sales in North America grew 53%, likely due to LTE network deployment by Sprint (NYSE:S), and sales in Greater China improved 38% on increased LTE spending in both Taiwan and China, especially by the world’s largest carrier, China Mobile (NYSE:CHL).

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 further revenue growth in the fourth quarter.

HERE Sales Show Robust Growth

HERE, Nokia’s mapping and location intelligence business, saw operational sales grow by 12% y-o-y on the back of rising sales to automobile customers and higher revenue realization from services offered to Microsoft. Sales to automobile customers represents over 50% of total HERE sales and its growth in the quarter was aided by higher auto sales as well as higher uptake of in-vehicle navigation systems by customers.

Nokia has made several interesting deals in the last couple of quarters to make its HERE unit more personalized and intuitive and boost the long term potential of its mapping business. The Finnish company acquired artificial intelligence firm Desti towards the end of May and announced its plans to buy predictive analytics company Medio Systems in June. Nokia also launched a $100 million Connected Car Fund around the same time to identify and invest in companies which can help grow HERE’s location and mapping ecosystem in the automotive space. ^{[4] [5] [6]} According to our estimates, HERE currently contributes less than 3% of the company’s valuation but its potential for future growth is immense considering the rising demand and growing penetration of intelligent location and mapping services, especially in autos and smartphones.

Nokia provides its map data to 80% of all car-navigation systems in the world and several major enterprises including Amazon (NASDAQ:AMZN), Yahoo (NASDAQ:YHOO) and Microsoft. ^[7] In fact, Microsoft is going to be one of Nokia’s biggest customers in the short to medium term with its four-year licensing deal to use HERE on its mobile devices. We expect the recent acquisitions and investments to help the company lay a solid foundation for its long-term growth and attract customers going forward.

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1. Q3 2014 Press Release, Nokia, Oct 23 2014 [↩]
2. Q3 2014 Presentation, Nokia, Oct 23 2014 [↩]
3. Nokia Q3 2014 Earnings Transcript, Seeking Alpha, Oct 23 2014 [↩]
4. Press Release- Desti Acquisition, Nokia, May 30 2014 [↩]
5. Press Release- $100m fund, Nokia, May 5 2014 [↩]
6. Press Release- Medio Acquisition, Nokia, June 12 2014 [↩]
7. Nokia to Buy Medio for Analytics Data in Map Push Against Google, Bloomberg, June 12 2014 [↩]