Nokia (NYSE:NOK) reported its fourth-quarter results before the market opened on Feb. 1. The bottom line was boosted by one-time gains in the technology business, while the networks business continued to slump. Nokia sees 2018 as another so-so year, but its guidance for 2019 and 2020 calls for much higher profits thanks to the rollout of 5G networks.

Nokia results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Growth

Sales

6.67 billion euros

6.73 billion euros

(0.9%)

Profit

716 million euros

676 million euros

5.9%

Earnings per share

0.13 euros

0.12 euros

8.3%

Data source: Nokia. All figures non-IFRS.

Nokia's logo in front of a building.

Image source: Nokia.

What happened with Nokia this quarter?

  • Nokia's networks revenue slumped 4.3% year over year to 5.83 billion euros. Within the networks segment, ultra-broadband networks revenue dropped 4.4% to 2.47 billion euros, global services revenue fell 6.7% to 1.64 billion euros, and IP networks and applications revenue declined 1.5% to 1.71 billion euros.
  • Networks gross margin declined by 330 basis points year over year to 37.6%, while operating margin declined by 300 basis points to 11.1%.
  • Nokia technologies revenue soared 79% year over year to 554 million euros. Gross margin was 94.6%, up 170 basis points, while operating margin was 70.2%, up 1,910 basis points.
  • Nokia technologies entered into a multiyear patent-licensing agreement with Huawei and received an arbitration ruling related to a contract dispute with Blackberry during the fourth quarter. These items produced 210 million euros of one-time revenue. The segment also recognized a one-time licensing cost of 40 million euros.
  • HMD Global, the exclusive brand licensee for the Nokia brand of mobile devices, launched six Android smartphones and five feature phones over the past year.

Nokia provided the following guidance for investors:

  • Non-IFRS operating margin between 9% and 11% in 2018, and between 12% and 16% in 2020. This margin expansion is expected to be driven by improved scale due to 5G network deployments, new patent-licensing deals, and lower support-function costs.
  • Non-IFRS earnings per share between 0.23 euros and 0.27 euros in 2018, and between 0.37 euros and 0.42 euros in 2020.
  • Dividend payments equivalent to between 40% and 70% of non-IFRS earnings, with a commitment to grow the dividend over time.
  • Recurring free cash flow slightly positive in 2018 and "clearly positive" in 2020.
  • Annual cost savings of 1.2 billion euros in 2018 from Nokia's merger with Alcatel-Lucent.
  • The networks business is expected to decline in line with its addressable market in 2018 but grow faster than its addressable market in the long run, thanks in part to 5G network deployments in 2019 and 2020.
  • The networks business is expected to produce an operating margin between 6% and 9% in 2018, and between 9% and 12% in 2020.
  • The licensing business within Nokia technologies is expected to grow at a 10% compound annual rate over the next three years.

What management had to say

Nokia President and CEO Rajeev Suri expects 5G network deployments to be a major tailwind for the company:

For 2019 and 2020, we expect market conditions to improve markedly, driven by full-scale rollouts of 5G networks. As those rollouts occur, Nokia is remarkably well-positioned. Unlike previous generations of technology, 5G requires a coordinated, holistic approach across all network elements, far beyond radio. That requirement plays to the strength of our end-to-end portfolio and our 5G Future X architecture.

Investments necessary to take advantage of this growth opportunity will hit the bottom line in 2018, but this is expected to be temporary:

As a result of the acceleration of investment in 5G due to the opportunity provided by the accelerated timeframe of 5G deployments, Nokia's operating margin will come under some pressure in 2018. That investment, combined with continued strong execution of our strategy to expand to new vertical segments, build a stand-alone software business, and maximize the value of our licensing business, will allow us to target improved results in 2020. Therefore, the Board is committed to propose a growing dividend, including for 2018.

Looking forward

While Nokia's results for 2018 are unlikely to impress, the company sees brighter skies ahead in 2019 and 2020 based on demand for 5G network technology. Nokia expects a dramatic improvement in profitability in 2020, which would be a breath of fresh air for investors who suffered through the stock's decline in 2017.

Suri sees the high end of the company's 2020 operating-margin target range as achievable. But those improvements are still more than a year away, and the company will need to execute well over the next few years to hit its targets.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.