Nokia Earnings Preview: Networks Should Drive Growth
Nokia (NYSE:NOK) is scheduled to release its Q4 2015 results on February 11th. The results will largely depend on the performance of its Networks segment, which accounts for about 60% of the company’s value, per our estimates. Not only do we expect the segment to sustain its sturdy revenue growth momentum, we expect operating margins to swell. Nokia’s strong position in China, a recovery in carrier spending in the U.S. and a hefty order pipeline can help the company’s top line, although the recent economic slowdown in China may have an offsetting impact. On the bottom line front, Nokia has seen tremendous sequential improvement during the first three quarters, which it expects to continue in Q4 as well. Despite the added pressure from low margin China deals and a shift in mix of global services, the company can push its margins upwards on the back of radio and core network technologies and cost efficiency efforts.
Our $8 price estimate for Nokia is around 15% higher than the current market price.
See our complete analysis for Nokia stock here
North America Was Likely Better
Nokia’s performance in North America last quarter was disappointing, as sales from the region fell 19% year over year (y-o-y), raising concerns around the overall telecom gear industry. Although the company attributed its weak performance to a tough comparable period, sluggish spending from telcos in the wake of macroeconomic weakness and fierce competition also played a crucial role. While economic weakness was resulting in weak 4G demand, competitive pricing prevented companies from improving revenue generated per 4G subscriber. This discouraged telcos from spending too much on network upgrades and expansion, and incentivized them to focus on increasing productivity instead. This ultimately impacted revenues for the entire networking ecosystem. However, during the quarter ended December 2015, Verizon and AT&T upped their capital spending significantly, which means that Nokia would have had an opportunity to improve its Q4 fiscal 2015 top line growth. Verizon’s wireless and wireline capital expenditures were up 20% and 5% (y-o-y), respectively, and AT&T’s capex was up 34%. [1]
Expect Mixed Results From China
While a management reshuffle among Chinese operators led to a 4G rollout slowdown during the third quarter, underlying demand stayed strong. Nokia was able to make the most of this, registering 27% growth in revenues from the Greater China region in Q3 fiscal 2015. This somewhat reflects the company’s strong position in the market, which could have helped it repeat its stellar Q3 performance. However, China’s economic conditions haven’t been great over the past couple of months, which could have prompted telecom companies to further delay their 4G rollouts, even though the current penetration is around just 20%. Nevertheless, Ericsson (NASDAQ:ERIC) saw 4G deployments improve during the fourth quarter. This can be taken as an indication that even Nokia might have overcome the economic headwinds in the market.
Margins
Nokia Networks’ margins in Q1 (3.2%) declined 610 basis points year over year, due to weak software sales, strategic entry deals (mainly in China), challenging conditions in the market, a rise in operating expenses and a shift in mix in global services. In the second quarter, the company was able to address a few of these issues, which helped get its profitability back on track. A significant increase in software sales and an easing in the impact of low-margin China deals helped Nokia improve its margins sequentially and annually. The third quarter was even better, as margins expanded around 2 percentage points sequentially driven by higher operating profits in mobile broadband, partially offset by lower operating profits in global services. We believe that strong contribution from overall radio and core networking technologies, and strength in systems integration business line likely helped Networks’ gross margins in Q4.
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