Cost Cutting, Licensing Operations Could Drive Nokia’s Q2

by Trefis Team
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Telcom equipment behemoth Nokia (NYSE:NOK) is expected to publish its Q2 2018 results on Thursday, July 26. Below we provide a quick overview of what to expect when the company publishes earnings. We have also created an interactive dashboard analysis which outlines our expectations for Nokia over the next two years.

Networks Business Could Remain Mixed

While the company expects its primary addressable market in the networking space to decline by 1% to 3% on a constant currency basis this year, there are likely to be some pockets of growth. For instance, the planned commercial roll-outs of 5G networks are expected to begin in North America later this year, with other regions including South Korea, China, Japan and the Middle East commencing build outs from 2019. However, it is likely that overall Networks revenues will remain sluggish for the company, as markets such as the Asia Pacific and China are likely to have slowed down their LTE deployments.

Update On Technology Licensing Business

Although patent royalties have accounted for a small portion of Nokia’s overall revenues historically, they are becoming more important to the company at a time when wireless infrastructure sales have been sluggish. Over the first quarter, the company saw recurring revenues from the licensing business up 65% year-on-year. The company says that it is at an annual recurring revenue run rate of roughly EUR 1.4 billion, and it’s possible that the metric could grow, with opportunities in the Chinese mobile OEM space and in the automotive sector.

Cost Cutting And Margins

Nokia has also been focusing on cutting costs to bolster its margins. The company is targeting total recurring annual cost savings of roughly EUR 1.2 billion ($1.4 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. While the gross margins saw some compression over Q1, declining by 370 basis points year-over-year amid a less favorable product mix and lower software sales, the company has indicated that it could see an improvement over the rest of the year.

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