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Nokia (NOK) Q2 Earnings Beat, Sales Up Y/Y, 5G Plan on Track

Zacks Equity Research

Nokia Corporation NOK reported solid second-quarter 2019 results on the back of 5G demand, a competitive end-to-end portfolio and improved operational strategy execution. The bottom and top lines beat the Zacks Consensus Estimate.

Net Loss

Reported loss for the second quarter was €193 million ($216.9 million) or loss of €0.03 (3 cents) per share compared with loss of €266 million or loss of €0.05 per share in the year-ago quarter. The improvement was primarily driven by higher gross profit, partly offset by net negative fluctuations in financial income and expenses.

However, non-IFRS profit came in at €258 million ($289.9 million) or €0.05 (6 cents) per share compared with €144 million or €0.03 per share in the prior-year quarter. The growth was mainly backed by solid operational execution, which yielded gross profit improvements across Networks, Nokia Software and Nokia Technologies. The bottom line beat the Zacks Consensus Estimate by 5 cents.

Nokia Corporation Price, Consensus and EPS Surprise


Nokia Corporation Price, Consensus and EPS Surprise

Nokia Corporation price-consensus-eps-surprise-chart | Nokia Corporation Quote


On a reported basis, net sales for the June quarter increased 7.2% year over year to €5,694 million ($5,713.7 million). The performance was driven by improved industry demand and competitiveness of Nokia’s end-to-end portfolio, with growth across four out of six regions and all customer types.

While net sales increased in Asia-Pacific, Europe, Latin America and North America (up 9%, 4%, 17% and 13%, respectively), it marginally slipped in Greater China and Middle East & Africa (down 2% and 1%, respectively).

Non-IFRS net sales grew 7.1% to €5,696 million ($6,400.4 million), surpassing the consensus estimate of $6,058 million.

Other Details

Non-IFRS cost of sales increased to €3,579 million from €3,279 million year over year. Non-IFRS gross profit improved 3.9% year over year to €2,117 million on the back of top-line growth. Non-IFRS operating income was €451 million compared with €334 million in the year-ago quarter.

Segment Results

In Networks, net sales increased 7.6% year over year to €4,393 million ($4,478.3 million). This was driven by Mobile Access, IP Routing and Optical Networks, partly offset by a decline in Fixed Access. The segment’s gross margin declined 200 basis points (bps) to 31.1%. Operating margin improved 190 bps to 2.7% owing to lower gross profit.

Net sales in Nokia Software were up 10.8% year over year to €678 million ($616.6 million), led by both applications and core networks that benefited from improved go-to-market capabilities, and the timing of completion and acceptance of certain projects. While the segment’s gross margin grew 660 bps to 52.7%, its operating margin jumped 1,370 bps to 20.2%.

Net sales in Nokia Technologies were up 6.1% year over year to €383 million ($420.1 million), driven by higher one-time and recurring licensing net sales, partly offset by the sale of the company’s digital health business in May 2018. While the segment’s gross margin improved 60 bps to 98.7%, its operating margin expanded 370 bps to 84.6%.

In Group Common and Other, net sales decreased 6.1% year over year to €263 million ($249.8 million), primarily due to Radio Frequency Systems, partly offset by growth in Alcatel Submarine Networks. The decrease in Radio Frequency Systems was due to the absence of a large customer roll out which benefited the prior-year quarter, while the increase in Alcatel Submarine Networks was due to the ramp up of new projects. The segment’s gross margin was 5.7%, down 1,290 bps.

Cash Flow & Liquidity

During the first six months of 2019, Nokia utilized €1,663 million of net cash in operating activities compared with cash utilization of €944 million in the year-ago period.

As of Jun 30, 2019, the technology company had €4,693 million ($6,575.4 million) in cash and equivalents with €3,949 million ($4,094.2 million) of long-term interest-bearing liabilities compared with the respective tallies of €4,993 million and €2,768 million a year ago.

2019 Guidance Reiterated

Nokia has reiterated its guidance for full-year 2019, owing to continued progress in strategy execution. This includes seasonality characterized by weaker first and third quarters, and stronger second and fourth quarters, with a particularly weak first quarter and an expected strong fourth quarter. The company anticipates non-IFRS operating margin between 9% and 12%. Non-IFRS earnings per share are expected in the range of €0.25-€0.29.

Going Forward

Nokia is witnessing robust progress in its expansion areas of Software and Enterprise and excellent momentum in IP Routing business. It continues to enhance its position in 5G, and currently has 45 commercial 5G deals and 9 live networks. This should 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 non-IFRS earnings per share in the range of €0.37-€0.42. However, risks which include trade-related uncertainty and challenges in the Chinese market persist for the Finnish telecom equipment maker.

Zacks Rank & Stocks to Consider

Nokia currently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include Comtech Telecommunications Corp. CMTL, InterDigital, Inc. IDCC and Viasat, Inc. VSAT. While Comtech sports a Zacks Rank #1 (Strong Buy), InterDigital and Viasat carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.   

Comtech surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 216.7%.

InterDigital surpassed earnings estimates thrice in the trailing four quarters, the average positive surprise being 49.3%.

Viasat surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 201.1%.

Conversion rate used:

€1 = $1.123661 (period average from Apr 1, 2019 to Jun 30, 2019)

€1 = $1.136641 (as of Jun 30, 2019)

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