Nokia Q3 Preview: Cost Management In Focus As Industry Headwinds Persist

+13.48%
Upside
3.54
Market
4.02
Trefis
NOK: Nokia logo
NOK
Nokia

Nokia (NYSE:NOK) is expected to report its third quarter results on October 26. We expect the company’s net revenues on a constant currency basis to trend lower over the quarter, driven by a slowdown in its bread-and-butter networking business, although this could be partly offset by improving prospects in the technology business. Below we take a look at some of the key factors we will be watching when the company publishes its results.

Trefis has a $6 price estimate for Nokia, which is in line with the current market price.

See our complete analysis for Nokia

Relevant Articles
  1. Is Nokia Stock A Buy At $4?
  2. Nokia Stock Looks Undervalued At $4
  3. Nokia Stock Poised For Recovery After Dismal Week?
  4. Nokia Stock Looks Set For Rally After Rough Month
  5. Can Nokia Stock Continue Weathering The Storm In The Broader Markets?
  6. Can Nokia Stock Continue Its Post-Earnings Outperformance?

Cost Cutting Will Be Key For Networking Business

Nokia’s Networking business will continue to face pressures, amid lower capital expenditures by wireless carriers, who have largely built out their 4G LTE networks and with 5G related investments only expected to kick in by the end of this decade. The company expects its primary addressable market to decline by 3% to 5% this year. Competition in the space has also been mounting, with Chinese players like Huawei competing aggressively for contracts. Given the market headwinds, Nokia is focusing on cutting costs to bolster its margins. The company is targeting total annual cost savings of roughly EUR 1.2 billion ($1.41 billion) to be achieved over the full year 2018, with EUR 800 million ($943 million) coming from operating expenditure cuts and EUR 400 million ($467 million) from a reduction in the cost of sales. Nokia has guided for an operating margin of 8-10% for its networks business, and we will be closely watching whether it is able to meet these targets.

Technology Business Could See Upside From Recent Deals

Nokia’s technology business saw net sales grow by about 90% year-over-year during Q2 2017, driven by a new license agreement in Q2 2017 and a license agreement that was expanded in Q3 2016. Although the technology business has accounted for a very small portion of Nokia’s overall revenues historically, IP licensing revenues have very high margins (gross margins of 95% during Q2), making them important to the company at a time when the broader wireless infrastructure market is going through a downturn. In recent quarters, the company has entered into a licensing deal with Apple, while also closing a licensing deal with Xiaomi Technology – marking its first deal with a Chinese manufacturer. While the size of the deal is likely small, it could open up new avenues for Nokia in the massive Chinese market. (related: How Is Nokia’s Licensing Business Faring?)

Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap |More Trefis Research