Nokia Earnings Review: Top Line Declines Slow As Mobile Networks Stood Strong

Nokia (NYSE:NOK) released its Q1’17 earnings on April 27, with reported net sales declining by 2%, but exceeding expectations primarily because of strength in the Mobile Networks and Licensing business. The company continued to report a net loss, but there was a slight improvement in comparison to Q1’16 because of efficiency improvements and its cost savings program. On a non-IFRS basis, the EPS of 0.03 was even with the last year.

Overall, these results indicate overall improvement for Nokia given that its competitor Ericsson continued to suffer from the slow market conditions. Going forward, we believe that mobile networks will continue to drive the growth as the company has signed some big projects in the segment. As the top line is not expected to return to growth in the immediate future, margin improvements through cost savings still remain the primary driver to improve the company’s near-term earnings.

Technology To Drive Mobile Network Revenues

According to a report by Cisco, global mobile data traffic will grow at 47% CAGR to reach 49 Exabytes per month by 2020. This creates a challenge for telecom operators, and an opportunity for network infrastructure companies to sell their technologies.

Nokia has recently made some advancement with its AirScale and Airframe technology, which should ease the evolution towards 5G. Leveraging this technology, the company has successfully signed deals with various telecom operators around the world who are trying to cope with the rising data demands of their customers. It includes a 4.5G pro deal with ALTAN Redes in Mexico, which is its largest deal ever in terms of revenue. Some other operators who will be upgrading to 4.5G using Nokia’s technology include TIM in Brazil and T-Mobile in the U.S, to name a few. Considering the slowdown in Nokia’s top-line decline, such deals may be revenue growth drivers in the coming quarters. In addition, Nokia is set to launch 4.9G by the end of this year, so we can expect 5G soon after that, which could allow the company to return to revenue growth.

Cost Efficiency Still Remains The Key To Profitability

Although the Networks business is on track to return to growth, it can take some time before big investments start flowing in 5G, which is not expected to be economically viable before 2018. Moreover, a lot of operators, especially in emerging markets, will shy away from investing in these new technologies right away. Until then, cost savings and efficiency improvements will be the key to protecting earnings this year. The company has reiterated its guidance of saving $1.2 billion by the end of 2018; therefore the upcoming quarters are likely to follow similar trends as in Q1.

See our complete analysis for Nokia

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