Nokia Earnings: China Concerns Overshadow Networks’ Profit Beat
Nokia (NYSE:NOK) was able to beat market expectations with its Q4 fiscal 2015 earnings, but its grim outlook prevented the stock from rising. During its earnings call, the company’s CEO warned investors about waning demand in China and some other markets. Interestingly, Nokia did not issue guidance for the ongoing quarter or the full year, suggesting that first quarter may be extremely tough for the company. As customers are likely to pull back their capex in light of the macroeconomic uncertainty, the company may not have much to work with. However, in the U.S., Nokia’s merger with the Alcatel-Lucent can help it offset the sluggishness in demand. Both Nokia and Alcatel-Lucent performed well in the recently concluded quarter, implying that both the companies are in good shape. The merger is in its final stages, as Nokia recently announced that it holds 91% of Alcatel-Lucent’s shares following the second round of its EUR 15.6 billion all-stock offer. [1] In China, Nokia is confident in its position, thanks to the combined installed base of Nokia and Alcatel Shanghai Bell, but a slowdown in 4G rollouts is a big concern.
Our $8 price estimate for Nokia is around 35% higher than the current market price. However, we are in the process of updating our model in light of the recent earnings release.
See our complete analysis for Nokia stock here
Networks Impresses With Strong Bottom Line Performance
Net sales for Nokia increased 3% on a reported basis, driven by a staggering 170% growth in Nokia Technologies’ revenues, partially offset by 5% decline in Networks’ revenues. Company-wide gross margins were up significantly, expanding 560 basis points year over year (y-o-y) and 370 basis points sequentially. While the Networks segment did not do as well on the top line front, its non-IFRS operating margins came in at 14.6%, its best performance since Nokia Siemens Networks was established. Operating margins were 600 basis points ahead of the year ago figure and 800 basis points better than the Reuters poll estimates. In addition to higher software sales, a marginal fall in operating expenses and catch-up payments from Samsung helped the Networks segment generate higher margins. Overall, consistent sequential improvement in operating margins after a disastrous Q1 helped Nokia Networks achieve its annual target. In fact, Networks margins for the year at 10.9% came in at the higher end of the company’s guidance of 8%-11%.
Banking On Alcatel Merger To Counter China Slowdown
Nokia CEO Rajeev Suri said that the company expects some growth this year in markets such as North America, India, the Middle East, and Africa, but demand in China is expected to fade. He mentioned in the earnings call that since China’s biggest carrier, China Mobile, undertook big rollouts over the last couple of years, it would most likely go easy on investments this year. Though he sees some spending potential from China Unicom and China Telecom, prevailing macroeconomic weakness can force these careers to delay their spending. Overall, Nokia has acknowledged that the Chinese telecom industry will remain soft this year, and competition from the local giant Huawei can make things worse. [2]
To retaliate against these headwinds, Nokia is banking on its merger with Alcatel-Lucent. During Q4, Nokia saw 17% y-o-y growth in its revenues from China, which reflects its strong position in the market. The company believes that this will be further strengthened with the combined base of Nokia and Alcatel Shanghai Bell. The company is proactively stirring up the leadership structure of Alcatel Shanghai Bell, putting in a new management team and board of directors. The deal is proceeding faster than expected, which bodes well for Nokia as it looks to take on Huawei amid ominous market conditions. Alcatel-Lucent reported 13% growth in its Q4 revenues with promising results from Asia and North America, which indicates that it is in a good shape and can help Nokia in China as well as the U.S.
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- Report for Q4 and Full Year 2015, Nokia, Feb 11 2016 [↩]
- Nokia’s Q4 fiscal 2015 earnings transcript, Feb 11 2016 [↩]