Nokia's Profit Goes Up, Guidance Goes Down

Nokia (NOK 0.28%) reported its second-quarter results before the market opened on July 27. Revenue declined slightly, driven by a 5% drop in networks revenue, but a strong quarter for the technologies segment offset much of that decline and led to a surge in the bottom line. Nokia was forced to lower its guidance slightly for the full year, citing worsening market conditions, but it still expects to hit its cost-cutting goal by the end of 2018. Here's what investors need to know about Nokia's second-quarter results.

Nokia results: The raw numbers

Data source: Nokia. All figures Non-IFRS.

Image source: Nokia.

What happened with Nokia this quarter?

• Nokia's networks revenue dropped 5% year over year, to 4.97 billion euros. Within the networks segment, ultra broadband-networks revenue slumped 8%, to 2.17 billion euros, global services revenue was flat, at 1.45 billion euros, and IP networks and applications revenue slumped 4%, to 1.36 billion euros.
• Networks gross margin increased by 150 basis points year over year, while operating margin increased by 220 basis points.
• Nokia technologies revenue surged 90% year over year, to 369 million euros. Gross margin fell 100 basis points, to 95.4%, while operating margin soared 1,640 basis points, to 62.3%.
• Roughly 40% of the technologies segment's year-over-year revenue increase was non-recurring and related to catch-up sales for the first quarter. The rest was driven by new license agreements.
• HMD Global, the exclusive licensee of the Nokia brand for phones and tablets, began shipping devices during the second quarter, including three smartphones, the Nokia 3, Nokia 5, and Nokia 6, and the Nokia 3310 featurephone.

Nokia provided the following guidance for investors:

• Annual cost savings of 1.2 billion euros from Nokia's merger with Alcatel-Lucent by 2018, unchanged from previous guidance.
• The networks business is expected to decline with the overall market during 2017, although the company stated that it now expects market conditions to be slightly more challenging than anticipated. The overall market is expected to decline by 3% to 5%, down from a low-single-digit decline that was previously expected.
• Nokia again provided no guidance for the technologies segment due to uncertainties in the timing and value of licensing agreements.

What management had to say

Nokia CEO Rajeev Suri remains confident the company can hit its operating-margin target despite a more difficult environment than expected:

I am proud of the entire Nokia team for delivering strong profitability in the second quarter and group-level net sales that were close to flat year-on-year. Underpinning this result was the excellent performance of Nokia Technologies, as well as robust gross margins and continued topline improvement in Networks. With the good work in the quarter, I remain confident that we will deliver on our full-year guidance of an operating margin of 8-10% in our Networks business.

Suri also pointed to a major catalyst in the coming years:

Despite these headwinds, I believe Nokia's disciplined operating model puts us in a strong position to succeed in conditions of all kinds and continue to deliver solid shareholder value. In addition, we are seeing catalysts in the United States, China and Japan that point to an acceleration of 5G and the commencement of meaningful roll-outs in 2019.

Looking forward

While a decline in the networks business was expected for 2017, Nokia's revenue guidance got a bit worse after the second quarter. The company left its operating-margin guidance unchanged, meaning that its cost-cutting program will likely need to pick up the slack. Nokia remains on track to fully realize its cost-cutting goal by the end of next year, and the potential roll-out of 5G should help drive the business forward beginning in 2019.