Why Nokia Is Getting More Aggressive With Its Cost Cutting Program

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Telecom equipment behemoth Nokia (NYSE:NOK) published its Q3 2018 results on Thursday, largely meeting market expectations, driven by growth in the North American market and the impacts of its recent cost-cutting plan. The company’s net sales remained about flat at 5.5 billion euros ($6.27 billion), while adjusted profits stood at 487 million euros ($554 million), marking a decline of 27% year-over-year. The company indicated that it was on track to deliver on its full-year guidance while noting that it would carry out another round of cost cuts, including significant layoffs. Below, we take a look at some of the trends that drove Nokia’s earnings and what lies ahead for the company.

Our interactive dashboard on what Nokia’s outlook is like details our expectations for the company over the next two years.

Networks Business Underperforms, But Should Slowly Gain Traction On 5G

Nokia’s bread-and-butter network business saw sales grow by 3% year-over-year on a constant currency basis to 4.89 billion euros, driven primarily by growth in the North American market. However, gross margins for the segment declined by 270 bps to 35.9%, due to weaker prices which reduced the impact of cost reductions the company made. Nokia has guided that it expects acceleration in the fourth quarter in North America with the customer demand for 5G increasing, as commercial 5G network deployments commence. While 5G could take time to scale up meaningfully, the company expects its primary addressable market for the networks business to grow on a constant currency basis over 2019 and 2020.

Nokia Technologies Sales Decline

Sales from the technology business declined by 27% year-over-year to 351 million euro ($398 million). However, operating margins for the business expanded by about 200 bps year-over-year to 82.6%. Nokia has been expanding the scope of its licensing business, catering to the automotive market and other areas. The company is looking to grow the recurring net sales from the business at a CAGR of approximately 10% over the three year period ending 2020. The business is likely to remain crucial to Nokia in the long run, given that revenues are largely recurring and have high margins.

Another Round Of Cost Cutting Planned

Nokia also announced a new cost-saving initiative, with plans to cut costs at an annual rate of 700 million Euros ($795 million) by the end of 2020. The company is looking towards digitization, automation and more process and tool simplification to drive savings while indicating that it would cut thousands of jobs across the globe. This is in addition to the 1.2 billion Euro ($1.363 billion) cost savings program that the company is expected to complete by the end of this year. The cost-cutting could be crucial for Nokia to bolster profitability as it waits for the 5G upgrade cycle to contribute more meaningfully to its revenues.

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