Weak Mobile Network Demand Plagues Nokia's Second Quarter

Image source: Nokia.

Nokia (NOK 3.85%) reported its second-quarter results before the market opened on Aug. 4. It was a rough quarter for the telecommunications infrastructure company, with a steep decline in both revenue and profit driven by weak demand for mobile network equipment. The company's integration of Alcatel-Lucent continues, and Nokia now expects to wring more cost savings than its previous guidance. Here's what investors need to know about Nokia's second-quarter results.

Nokia results: The raw numbers

YOY = year over year. All figures non-IFRS (non-international financial reporting standards). Q2 2015 sales combine Nokia and Alcatel-Lucent results. Data source: Nokia Q2 earnings report.

What happened with Nokia this quarter?

Weak sales in the mobile network business drove Nokia's revenue decline.

• Nokia's network sales slumped 11% year over year, driven by a 12% drop in ultra-broadband network revenue. Mobile networks, which account for most of Nokia's ultra-broadband network revenue, slipped 14% year over year.
• IP networks and applications also contributed to the decrease, with sales dipping by 11% year over year.
• Network gross margin slumped 50 basis points to 37.4%, while operating margin fell 270 basis points to 6%.
• Nokia Technologies sales slid by 11% year over year, primarily due to one-time items during the second quarter of 2015. Excluding these items, revenue would have increased by 10% year over year, led by higher intellectual property licensing income.

Nokia provided various pieces of guidance for investors.

• The company now expects its acquisition of Alcatel-Lucent to produce 1.2 billion euros of annual cost savings by 2018, up from previous guidance calling for at least 900 million euros of savings.
• Nokia's networks business is expected to produce a year-over-year sales decline in fiscal 2016, with an operating margin between 7% and 9%. The business will be negatively affected by a nearly flat capital expenditure environment and a declining wireless infrastructure market.
• The company refused to provide guidance for Nokia Technologies, stating that risks and uncertainties related to the timing and value of licensing agreements make providing an outlook inappropriate for fiscal 2016.

What management had to say

Nokia CEO Rajeev Suri summarized the areas where Nokia made progress during the second quarter:

During the quarter we continued to make excellent progress in many areas. We moved rapidly forward with our integration and cost savings efforts; saw robust growth in our Fixed Networks business; announced the acquisition of Gainspeed in order to accelerate our progress with cable operators; closed the acquisition of Withings; reached a licensing deal that will see the Nokia brand return to smartphones and tablets; and more.

Suri also gave an update on the integration of Alcatel-Lucent:

We crossed the 95% ownership threshold of Alcatel-Lucent in June, allowing us to move to acquire the remaining shares and reach full ownership of Alcatel-Lucent, which we expect by the end of October. As our successful integration work continues and as we get increased granular visibility into the business, our confidence in our ability to deliver cost savings also increases. As a result, we are now targeting EUR 1.2 billion in total cost savings to be achieved in full year 2018.

Looking forward

The acquisition of Alcatel-Lucent introduces various one-time items that muddle Nokia's financial results. However, it's clear that the company is facing some major challenges, particularly in its mobile network business. Profit took a steep dive during the second quarter, even after backing out acquisition-related costs.

The silver lining in Nokia's results is the company's improved cost synergy guidance. A 1.2 billion-euro cost reduction will help improve Nokia's bottom line, although investors will need to wait until 2018 before the benefits become evident.