Things Should Look Up For Nokia After A Mixed Q2

Nokia (NYSE:NOK) published its Q2 2018 results on Thursday, July 26, posting a weaker than expected set of figures, as sales of the company’s bread-and-butter Networks business continued to decline. However, things are poised to get better over the second half of the year, with the company anticipating a continued recovery through 2020 as the deployment of the next generation wireless networks gathers pace. Below, we take a look at what lies ahead for Nokia.

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

Networks Business Should See Turnaround In The Second Half

Nokia’s Networks business saw its sales decline by 6% year-over-year, although sales remained flat on a currency adjusted basis, as the networking market continued to contract (Nokia projects 1 to 3% contraction in 2018). However, things should improve going forward, as 5G deployments are expected to begin later this year with demand from North America also picking up. Nokia could have some advantages going into the 5G upgrade cycle. For instance, the company’s installed base of its high-capacity AirScale product is growing fast, and this could enable customers to upgrade to 5G without swapping their hardware. Moreover, the company notes that about 40% of its sales pipeline consists of end-to-end deals, which encompass products and services ranging from IP, optics, RF, software and in-house silicon. This could be more important for the company as the shift to 5G calls for multiple underlying technologies including fibre backhaul, network slicing and IP infrastructure. Nokia expects its net sales to outperform its primary addressable market over the next two years, with operating margins potentially expanding from about 1.5% in Q2 to double-digit levels in 2020.

Updates On Licensing

Although patent royalties have accounted for a small portion of Nokia’s overall revenues historically, they are becoming more important as the company expands sales to new markets including Chinese mobile OEMs and customers in the automotive sector. The Licensing business fared well over the quarter, posting 23% year-on-year growth in recurring licensing net sales and a 27% year-on-year increase in operating profits, primarily relating to licensing agreements entered into in 2017. However, the company didn’t garner any major agreements over the second quarter. Nokia is looking to drive a compound annual growth rate of approximately 10% for recurring net sales over the three year period ending 2020.