Nokia (NOK) Beats Q3 Earnings Estimates, Falters on Revenues

Nokia CorporationNOK delivered tepid financial results in third-quarter 2018 with year-over-year decrease in both non-IFRS top- and bottom-line numbers.

Net Income

Reported loss for the third quarter improved 56.4% year over year to €79 million or loss of €0.01 per share, primarily due to decrease in R&D and other expenses. Non-IFRS profit declined 40.1% year over year to €309 million or €0.06 per share ($359.2 million or 7 cents per share), beating the Zacks Consensus Estimate of 6 cents.

Nokia Corporation Price, Consensus and EPS Surprise

Nokia Corporation Price, Consensus and EPS Surprise | Nokia Corporation Quote


On a reported basis, net sales for the third quarter decreased 1% year over year to €5,458 million ($6,344.5 million). Non-IFRS net sales fell 1.4% to €5,461 million ($6,350 million), missing the Zacks Consensus Estimate of $6,562 million.

Operating Metrics

Non-IFRS gross profit decreased 9.5% year over year to €2,141 million ($2,488.7 million). Non-IFRS operating profit fell 27.1% to €487 million ($566.1 million) with margin down 320 basis points (bps) to 8.9%.

Segmental Performance

In Nokia's Networks business , net sales increased 1.3% year over year to €4,888 million ($5,681.9 million). While net sales improved in Asia-Pacific, Latin America and North America (up 4%, 3% and 12%, respectively), it declined in Greater China and Middle East & Africa (down 15% and 10%, respectively). Europe's tally was almost stable year over year. The segment's gross margin declined 270 bps to 35.9%, primarily due to higher operational costs. Operating margin decreased 190 bps to 5% owing to lower gross profit.

Net sales in Ultra Broadband Networks improved 1.2% year over year to €2,125 million, primarily due to Mobile Networks, which benefited from growth in small cells. Net sales in Global Services increased 1.5% to €1,380 million driven by managed services, and network planning and optimization, partly offset by care. Net sales in IP Networks and Applications improved 1.3% to €1,383 million owing to optical networks driven by the company's strong portfolio. However, it was partly offset by IP routing, which was adversely affected by component shortages in supply chain.

Net sales in Nokia Technologies were down 27.3% year over year to €351 million ($408 million), primarily due to the absence of approximately €180 million of non-recurring catch-up licensing net sales, which benefited the prior-year quarter. While the segment's gross margin improved 180 bps to 99.7%, its operating margin expanded 190 bps to 82.6%.

In Group Common and Other , net sales decreased 6.4% year over year to €235 million ($273.2 million) primarily due to Alcatel Submarine Networks, partly offset by Radio Frequency Systems. The decline in Alcatel Submarine Networks was due to the completion of a large project, which benefited the year-ago quarter. The segment's gross margin was 15.7%, up 300 bps.

Cash Flow and Balance Sheet

During the first nine months of 2018, Nokia utilized €1,026 million of cash in operations compared with €179 million of cash utilization in the year-ago period. As on Sep 30, 2018, Nokia had cash and cash equivalents of €4,799 million ($5,567.7 million) while its long-term interest-bearing liabilities were €2,768 million ($3,211.4 million).

In the third quarter, the company's net cash and current financial investments decreased 31.3% year over year to €1,876 million.

2018 Guidance Reiterated

Nokia reiterated its earlier guidance for full-year 2018 and remains on track to deliver approximately €1.2 billion of recurring annual cost savings excluding Nokia Technologies in full-year 2018, of which approximately €800 million is expected from operating expenses. The company expects non-IFRS operating margin to be between 9% and 11%. While non-IFRS earnings per share are expected in the range of €0.23-€0.27, non-IFRS tax rate is anticipated to be approximately 30%. Capital expenditures are likely to be approximately €700 million.

Moving Forward

Nokia continues to execute its strategy with particularly good progress in Nokia Software and expansion to select enterprise vertical markets. In a separate announcement, Nokia stated that it has expanded the patent license agreement with Samsung, which would otherwise have expired at the end of 2018. Per the agreement, Samsung will make payments to Nokia for a multi-year period beginning Jan 1, 2019. The terms of the agreement remain confidential. The move exhibits the strength of Nokia's patent portfolio and its leadership in R&D and licensing for cellular standards including 5G.

Furthermore, Nokia announced plans to accelerate strategy execution, sharpen customer focus and reduce long-term costs. This will help the company position itself for long-term 5G leadership and reaffirm commitment to full-year 2020 non-IFRS operating margin between 12% and 16% and earnings per share in the range of €0.37-€0.42 guidance.

Zacks Rank and Stocks to Consider

Nokia currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Comtech Telecommunications Corp. CMTL , Ubiquiti Networks, Inc. UBNT and Harris Corporation HRS . While Comtech and Ubiquiti sport a Zacks Rank #1 (Strong Buy), Harris carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Comtech, Ubiquiti and Harris have a long-term earnings growth expectation of 5%, 18.6% and 6%, respectively.

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€1 = $1.162421 (Period average from Jul 1, 2018 to Sep 30, 2018)

€1 = $1.160185 (As on Sep 30, 2018)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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