Nokia Earnings Preview: Weak Network Market Conditions To Weigh On Top Line

World’s leader in network infrastructure, Nokia (NYSE:NOK) will release its Q4 and full year earnings on February 2nd. Nokia suffered a hefty decline of 9% in its non-IFRS net sales for the first nine months of 2016. This was led by slowdown in wireless network market and declining demand for 4G equipment. The bottom line continued to suffer because of slowdown in the sales, however gross margins grew by a considerable 200 and 130 basis points in Q3 and first nine months, respectively. The primary reason for the improvement was the strong cost savings and restructuring program undertaken by Nokia to curb the eaffects of the slow market.

Going forward, the company has guided for weak market conditions to continue. However, cost savings programs and new technology innovations in Q4 will offer a slight ray of hope for the future plans of Nokia.

See our complete analysis for Nokia

Network Infrastructure Spending To Remain Sluggish

The sluggish conditions in network infrastructure likely continued in Q4 as there has been no trigger for the market to register a turnaround.  However, most expect a phase of network upgrades to begin later in this decade. The top line in Q3 declined by 7% year over year and the company has guided for a similar decline in Q4 as well. Also, Nokia expects network infrastructure market to continue to decline at low single digits in 2017, which leaves Nokia Technologies (licensing division) in charge to offset any top line declines in coming quarters.

Cost Savings And A Leap In New Technology Are The Only Ray Of Hopes Yet

• Nokia has undertaken a strong restructuring and cost saving initiative which is resulting in the margin protection amidst slowdown in Nokia’s core market. The company was able to save €640 million by the end of Q3 in a target to cut down €1.2 billion in costs.
• Also, the company had identified 400 efficiency actions to be implemented in Q4, which might have been a tailwind to bottom line in the quarter.
• Nokia was planning to shut down 100 of its real estate sites by the year end to cut down further on its costs.
• On the technology front, Nokia is planning to roll out 4.5G and 4.9G in the process of evolving to 5G. Recently, it was able to test the speeds of up to 40 GBPS in a combined effort with Ooredoo Qatar.
• In an effort to capture the future growth in IoT (Internet of Things), Nokia has collaborated with Vodafone and Telit in Q4.
• Going ahead, Nokia is expected to reap the benefits of launch of Nokia Android smartphones. It will add to the licensing revenues of Nokia as the company will receive a royalty fee from HMD global for every mobile phone sold under its brand name. The first phone of this series ‘Nokia 6’ was launched in January in China.

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