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Nokia (NOK) Q3 Earnings Miss, Shares Fall on Tweaked View

Zacks Equity Research
·6 min read

Nokia Corporation NOK reported unimpressive third-quarter 2020 results, wherein the top and the bottom lines missed the respective Zacks Consensus Estimate.

The Finland-based telecom equipment provider announced some important changes to its operating model. This has been done to better align with the needs of its customers and thereby improve its performance and create shareholder value.

Shares tumbled as much as 18% in pre-market after Nokia tweaked its outlook for non-IFRS earnings per share and non-IFRS operating margin for 2020.

Net Income

Reported profit (from continuing operations) in the quarter was €203 million or €0.04 per share compared with €87 million or €0.01 per share in the year-ago quarter.

Non-IFRS profit came in at €305 million ($356.5 million) or €0.05 (6 cents) per share compared with €267 million or €0.05 per share in the prior-year quarter. The improvement was driven by progress related to the cost savings program and a net positive fluctuation in financial income and expenses. However, the momentum was partly offset by higher investments in 5G R&D to accelerate product roadmaps and cost competitiveness in Mobile Access.

The bottom line missed the Zacks Consensus Estimate by a penny, with the negative surprise being 14.3%.

Nokia Corporation Price, Consensus and EPS Surprise

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

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

Revenues

On a reported basis, net sales in the quarter fell 6.9% year over year to €5,294 million, largely due to lower services within Mobile Access. The services-related declines were due to lower levels of network deployment services.

Net sales declined in four out of the six regions on a year-over-year basis — North America, Asia-Pacific, Greater China and Latin America (down 3%, 24%, 19% and 35%, respectively). The same grew in Europe and Middle East & Africa (up 4% and 20%, respectively).

Quarterly non-IFRS net sales were €5,294 million ($6,187 million) compared with €5,688 million in the prior-year quarter. The top line lagged the consensus estimate of $6,413 million.

Segment Results

Networks sales (which accounts for the lion’s share of total revenues) fell 7.3% year over year to €4,112 million. This was primarily due to Mobile Access, partly offset by growth in Optical Networks. The decrease in Mobile Access was due to network deployment and planning services and 2G and 3G radio technologies. The services-related declines were due to lower levels of network deployment services. The segment’s gross margin surged 370 basis points (bps) to 32.8%. Operating margin increased 350 bps year over year to 6.4%.

Nokia Software sales were down 13.6% year over year to €585 million. This was in comparison to a particularly strong third-quarter 2019, which benefited from the timing of completions and acceptances of certain projects. Also, sales in the reported quarter were negatively impacted by some project delays. The company continued to progress with its strategy to strengthen the business, supported by strong execution and the comprehensiveness of its portfolio. The segment’s gross margin fell 420 bps to 48.7%. Operating margin declined 810 bps to 14.9%.

Nokia Technologies sales declined 7.5% year over year to €331 million. This was due to lower brand licensing net sales and lower one-time net sales, as well as lower patent licensing net sales on account of the expiration of some small patent licensing agreements. One-time net sales amounted to almost zero in third-quarter 2020 and €10 million in the year-ago quarter. The segment’s gross margin improved 130 bps to 99.1%. Operating margin advanced 70 bps to 82.8%.

In Group Common and Other, sales improved 16.5% year over year to €275 million, primarily driven by Alcatel Submarine Networks. The growth in Alcatel Submarine Networks was driven by strong demand and the re-opening of factories following COVID-19-related closures in the first half of 2020. The segment’s gross margin was 7.6%, up 420 bps.

Other Details

Overall, non-IFRS cost of sales decreased to €3,313 million from €3,682 million in the year-ago quarter. Non-IFRS gross profit declined 1.2% year over year to €1,981 million. Non-IFRS operating profit was €486 million compared with €478 million in the year-ago quarter.

Cash Flow & Liquidity

In the first nine months of 2020, Nokia generated €880 million of net cash from operating activities against a cash utilization of €1,199 million in the year-ago period.

As of Sep 30, the company had €6,836 million ($8,014.4 million) in cash and cash equivalents with €5,099 million ($5,978 million) of long-term interest-bearing liabilities compared with the respective tallies of €4,721 million and €4,063 million a year ago.

2020 Outlook Tweaked

Nokia has tweaked its outlook for 2020. The company now expects non-IFRS earnings per share of €0.23 (+/- 3 cents), adjusted from an earlier expectation of €0.25 (+/- 5 cents). Non-IFRS operating margin is estimated to be 9% (+/- 1 percentage points), changed from an earlier expectation of 9.5% (+/- 1.5 percentage points).

For 2021, the company expects a non-IFRS operating margin of 7-10%. Nokia intends to provide a long term outlook, latest at Capital Markets Day on Mar 18, 2021. This is due to ongoing work related to its strategy and a new operating model.

Zacks Rank & Stocks to Consider

Nokia has a Zacks Rank #3 (Hold), at present.

Some better-ranked stocks in the broader industry are Viasat VSAT, Viavi Solutions VIAV and Harmonic HLIT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Viasat delivered a trailing four-quarter positive earnings surprise of 361.3%, on average.

Viavi delivered a trailing four-quarter positive earnings surprise of 17.5%, on average.

Harmonic delivered a trailing four-quarter positive earnings surprise of 41%, on average. The company’s earnings beat the Zacks Consensus Estimate in three of the last four quarters.

Conversion rate used:

€1 = $1.168692 (period average from Jul 1, 2020 to Sep 30, 2020)

€1 = $1.172382 (as of Sep 30, 2020)

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