Nokia Earnings Preview: Strong Networks Sales Likely To Drive Results

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Nokia (NYSE:NOK) is scheduled to release its Q4 results on Thursday, Jan 29. In the previous quarter, 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, the global mapping division HERE saw net sales grow 12% y-o-y to EUR 236 million ($299 million). Meanwhile, the 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]

When Nokia comes out with its fourth quarter results, we expect its overall sales to improve on account of strong Networks sales. The company has built a strong pipeline of orders on a number of contract wins in Europe, such as Everything Everywhere and Vodafone, which should help bolster top line growth. 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. [4]

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

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Recent Contract Wins To Boost Networks Sales

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 of 2014 as the company exited unprofitable service contracts, primarily in EMEA and Latin America.

In the next six months, 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 and Q3 2014 Networks revenues actually grew by 1% and 13% y-o-y, respectively, compared to a decline of 6% in Q1 2014 and 22% 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 fourth quarter. The company’s contract win at Sprint is also likely to boost revenues in the near term, with the carrier likely to splurge on its Spark program now that its initial LTE layout is complete.

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Notes:
  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. Nokia Networks Unveils $970M 4G Deal With China Mobile, Light Reading, Oct 10 2014 []