Nokia Earnings Preview: Strong Order Pipeline To Drive Networks Sales

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Nokia (NYSE:NOK) is scheduled to release its Q1 results on Thursday, April 30. 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 8% year-over-year (y-o-y) on a constant currency basis to EUR 3.4 billion ($3.85 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 15% y-o-y to EUR 255 million ($289 million), and the Intellectual Property (IP) licensing division Nokia Technologies reported a 23% y-o-y increase in sales to EUR 149 million ($169 million) on account of higher income from certain licensees including Microsoft (NASDAQ:MSFT). ((Q4 2014 Press Release, Nokia, Jan 29 2015)) [1] [2]

When Nokia comes out with its first quarter results, we expect its overall operational sales to improve y-o-y on account of strong Networks sales, which contributes about 90% of total revenue. The company has built a strong pipeline of orders on a number of contract wins in the U.S, Europe, India and China, with carriers such as T-Mobile (NYSE:TMUS), Sprint (NYSE:S), China Mobile (NYSE:CHL), China Telecom (NYSE:CHA), Vodafone, Bharti Airtel and Mobily increasing their network spending. However, lower margin LTE deals in China may put a dent in the company’s operating profits for the quarter on a sequential basis. Compared to stellar adjusted operating margins of 12.5% in Q4 2014, the company estimates its operating margin for Networks to be in the range of 8-11% for full year 2015 and we expect them to trend towards the middle of this range in the first quarter. [3]

This is the first earnings call after Nokia agreed to buy Alcatel-Lucent in a 15.6 billion Euro ($16.6 billion) all-stock deal, and we will keep an eye on updates on this front as well. Our $8 price estimate for Nokia is in line with the current market price.

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How Networks Sales Turned Around In 2014

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 nine months, the company was able to reverse much of its top-line decline by banking on higher LTE spending across geographies, especially North America, Greater China and Asia-Pacific. Excluding the impact of divestitures, contract exits and currency fluctuations, Nokia’s Q2, Q3 and Q4 2014 Networks revenues grew by 1%, 15% and 8% y-o-y, respectively, compared to a decline of 6% in Q1 2014 and 22% in Q4 2013.

The company’s solid turnaround in the third quarter was driven by robust growth in North America where sales grew 53%, likely due to LTE network deployment by Sprint, and Greater China where sales grew 38% on increased LTE spending in both Taiwan and China, especially by the world’s largest carrier, China Mobile. Nokia continued its growth momentum in Q4 2014 on the back of a 13% y-o-y growth in Mobile Broadband and a return to positive sales growth in Global Services. Mobile Broadband sales were driven by strong sales growth in North America (95%) and modest growth in Europe, Middle East and Africa.

Strong Order Pipeline To Boost Networks Sales In Q1

Going forward, rising 4G LTE deployment activity should continue to help Nokia 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 addition to the company’s recent contract with T-Mobile, its 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.

India is also a very important market for Nokia, where it had a very strong 2014. It ended the year with over 34 deal wins for services including modernization of 2G and 3G networks, 4G deployment, WiFi solutions, security solutions and device management. With this, Nokia led the country’s 4G LTE market in terms of contract wins last year and was also the market leader in 2G, 3G, Managed Services and GSM-Railways. Nokia’s recent deals include a $200 million contract from market leader Bharti Airtel to build India’s first 4G network, a five-year contract with wireless major Vodafone for the modernization of its radio access network (RAN) equipment, and a three-year network upgrade deal with India’s third largest carrier Idea Cellular. Following the recent deals, Nokia is now working with Vodafone in 19 out of the 22 telecom circles in India, and has also become the biggest equipment provider to Idea Cellular in the country (also read Can Nokia Take Advantage Of India’s Shift To 4G?).

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Notes:
  1. Q4 2014 Presentation, Nokia, Jan 29 2015 []
  2. Nokia Q4 2014 Earnings Transcript, Seeking Alpha, Jan 29 2015 []
  3. Nokia Networks Unveils $970M 4G Deal With China Mobile, Light Reading, Oct 10 2014 []