Margin Expansion Key To Nokia’s Performance As Top Line Is Likely To Remain Weak

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Nokia (NYSE:NOK) released its earnings on July 27th. The company went on to report a decline of 6% in its constant currency net sales because of a continued slowdown in the mobile networks market, which was slightly offset by strong growth of 90% in the licensing business because of a licensing deal with Apple. Nokia also managed to close a licensing deal with leading Chinese smartphone maker Xiaomi.

The bottom line saw a significant improvement in the form of comparatively leaner net loss figures. Non-IFRS EPS went on to increase from EUR 0.03 in Q2’16 to EUR 0.08 in Q2’17, mainly led by the improvement in gross margins which grew by 2.8% to 41.7% in Q2.

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Revenues May Continue To Decline In The Wake of Bleak Market Conditions

Going forward, we believe that growth in mobile networks business is crucial for the overall turnaround in Nokia’s top line. Although growth in Nokia’s licensing division and its services business are continuing to offset the declines in the networks division to some extent, but it is worth noting that these businesses are relatively small when compared to the Networks business, and won’t be able to cover up the loss in revenue from the core business of Networks anytime in the near future.

Given the fact that flow of investments in 5G are only expected to kick in by the end of this decade, it can be concluded that we can further see this phase of slight decline or stagnation in Nokia’s top line during the upcoming financial periods as well.

Cost Saving Remains The Key For Nokia’s Profitability In Tough Times

However, on a positive side, the expansion in Nokia’s gross margin, and the re-iteration of its yearly target of achieving 8-10% operating margin for FY’17, has given Nokia an advantage over its competitor Ericsson, whose loss has further expanded in the recently concluded earnings.

To keep the margins strong, Nokia plans to save EUR 1.2 billion in operating expenses and cost of sales by the end of FY’18 which will be the key to further margin expansion in the near future.

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