A Steep Revenue and Earnings Drop for Nokia

Image source: Nokia.

Nokia (NOK -0.81%) reported its third-quarter results before the market opened on Oct. 27. Weakness in the company's networks business continued to knock down revenue and profits, with mobile networks particularly weak. A surge in revenue and operating profit from the technologies segment partially offset this weakness, but it wasn't enough to prevent a steep decline in sales and profit. Here's what investors need to know about Nokia's third-quarter results.

Nokia results: The raw numbers

All figures non-IFRS (non-international financial reporting standards). Q3 2015 sales combine Nokia and Alcatel-Lucent results. Data source: Nokia Q3 earnings report. YOY = year over year.

What happened with Nokia this quarter?

Weakness in Nokia's networks segment, particularly mobile networks, was responsible for much of the company's sales decline.

• Nokia's network sales slumped 13% year over year on a comparable basis, with mobile networks suffering a 15% decline and fixed networks growing by 3%.
• Revenue from IP networks and applications tumbled 9% year over year.
• Network gross margin increased by 20 basis points year over year to 37.2%, while operating margin contracted 320 basis points to 8.1%. Roughly flat operating expenses despite the steep revenue drop drove profits lower.
• Nokia Technologies sales soared 109% year over year on a comparable basis, bringing in 353 million euros. Operating profit jumped 168% to 225 million euros.

Nokia provided the following pieces of guidance for investors:

• The company expects to achieve 1.2 billion euros of annual cost savings by the end of 2018 from its acquisition of Alcatel-Lucent. This guidance is unchanged from the second quarter.
• Nokia expects its networks business to record a revenue decline in 2016, driven by a weakening capital expenditure environment and wireless infrastructure market. The company expects full-year operating margin between 7% and 9%.
• Nokia again did not provide guidance for the Nokia Technologies segment, citing uncertainties surrounding the timing and value of certain licensing deals.

What management had to say

Nokia CEO Rajeev Suri explained why Nokia is prepared for a difficult operating environment:

I believe that Nokia remains well-positioned for this environment. Our disciplined operating model of tight cost controls, prudent investment and focused innovation; our constant industrialization of best practices across the company; our structured approach to fast integration and synergy capture -- all help give us a competitive advantage.

Suri sees a difficult fourth quarter, but is confident in Nokia hitting its targets:

While the fourth quarter is expected to be soft from a top-line perspective, I believe that we will meet our guidance for our Networks business of significant sequential sales and operating margin increase for Q4 and our full-year operating margin guidance of 7% to 9%. In short, we remain on track in our execution and focused on creating value for our customers and shareholders.

Looking forward

Nokia's guidance was mostly unchanged, save for slightly more pessimistic language regarding the expected capital expenditure environment. Margins are holding up reasonably well, as Suri noted, and the expected cost savings from the acquisition of Alcatel-Lucent could help boost profitability further. But there appears to be no end in sight to the weakness in Nokia's networks business.