Why The Worst May Be Over For Nokia

Nokia (NYSE:NOK) has been posting relatively mixed results over the last few years, amid intense competition from Chinese rivals and weaker spending by wireless carriers, who have seen their deployments of 4G mobile broadband equipment peak off. However, the worst seems to behind the company for multiple reasons, which we outline below.

We have created an interactive dashboard analysis which outlines our expectations from Nokia over the next two years.

Networks Business Could See Upside As Carriers Bet On 5G

Nokia expects to see the market for telecom equipment recover, as commercial roll-outs of 5G networks begin in North America later this year, with other regions including South Korea, China, Japan and the Middle East commencing build outs from 2019. While analysts remain skeptical if 5G spending will reach levels seen at the peak of the 4G deployments in 2015, as the use cases and business cases for the technology still need to be ironed out, the investment cycle will nevertheless help Nokia’s networking division return to growth over the next two years.

Separately, Nokia could also see an upside from the headwinds faced by Chinese rival ZTE, after the U.S. Department of Commerce blocked its access to American-made components for seven years, amid alleged violations of the Iran sanctions. The disruption of ZTE’s supply chain could cost it a significant amount of business, as it could take a lot of time to identify alternative suppliers for components and re-design its products. ZTE had been posting solid growth in markets including Europe and the Americas, hurting contract pricing and growth for its European rivals, and its current headwinds could benefit Nokia.

Licensing Operations Benefit From Recent Deals

Nokia’s licensing business has been faring well over the last year driven by multiple licensing agreements that the company reached. In mid-2017, Apple paid Nokia €1.7 billion (around $2 billion) to settle all litigation related to their intellectual property dispute. In addition to the one-time payment, Nokia will also earn ongoing royalties, and collaborate with Apple on some health-related projects. Nokia also signed a patent cross-licensing deal with Xiaomi – marking the company’s first deal with a Chinese manufacturer. Nokia is projecting that its licensing business will see a compound annual growth rate of roughly 10% for its recurring net sales through 2020.

Cost Management

Nokia has also been focusing on cutting costs to bolster its margins. The company is targeting total recurring annual cost savings of roughly €1.2 billion ($1.43 billion) by 2018, following its acquisition of Alcatel Lucent. The improving market conditions, coupled with the cost savings, could help Nokia improve its EPS in the medium-term.

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