Nokia Has a Rough Quarter but Boosts Its Full-Year Outlook

Nokia (NOK 0.28%) reported its first-quarter results before the market opened on April 26. Revenue and profit tumbled thanks to a weak performance from the networks business, partially offset by growth in the licensing business. The company expects the situation to improve starting in the second half of this year thanks to the rollout of 5G technology, and it raised its full-year outlook to reflect that expectation. Here's what investors need to know.

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 tumbled 12% year over year to 4.32 billion euros ($5.23 billion as of April 26, 2018). Adjusted for currency, revenue declined by just 3%. Within the networks segment, ultra-broadband networks revenue fell 17% to 1.86 billion euros, global services revenue dropped 9% to 1.24 billion euros, and IP networks and applications revenue declined 6% to 1.3 billion euros.
• Networks gross margin declined by 370 basis points year over year to 35.8%, while operating margin slumped 560 basis points to 1%.
• Networks gross margin was affected by unfavorable regional and product mix, as well as foreign exchange fluctuations.
• Nokia technologies revenue jumped 48% year over year to 365 million euros. Gross margin was 97.3%, up 260 basis points year over year, while operating margin was 75.1%, up 2,810 basis points.
• Within the technologies segment, 349 million euros of revenue was related to patent, brand, and technology licensing, while 16 million euros of revenue was related to digital health. The company is currently reviewing strategic options for its digital health business.
• The technologies revenue increase was due to recurring net sales related to license agreements entered in 2017.
• HMD Global, Nokia's exclusive brand licensee for mobile devices, launched four new Nokia-branded smartphones and a new feature phone at the Mobile World Congress. This partnership has helped the Nokia brand rebound in the smartphone market.

Nokia provided the following guidance:

• Non-IFRS operating margin between 9% and 11% in 2018, and between 12% and 16% in 2020 -- unchanged from previous outlook.
• Non-IFRS diluted earnings per share between 0.23 euros and 0.27 euros in 2018, and between 0.37 euros and 0.42 euros in 2020 -- unchanged from previous outlook.
• The networks business is now expected to outperform its primary addressable market in 2018 and over the longer term. Previous guidance called for sales to decline along the addressable market this year.
• Nokia sees the primary addressable market for the networks business declining by 1% to 3% in 2018, an improvement over the previous outlook calling for a 2% to 4% decline. The company expects improved market conditions during the second half of the year, particularly in North America.
• The licensing business is still expected to grow by 10% annually through 2020, achieving an 85% operating margin by the end of that period.

What management had to say

Nokia President and CEO Rajeev Suri commented on the company's improved outlook:

Our confidence is based on strong order intake and backlog in Q1; our end-to-end strategy is resonating with customers, resulting in strong cross-sell activity and a year-on-year doubling of the multi-business group pipeline; we have clear visibility to 5G deals for large-scale commercial rollouts in United States in the second half of the year; and are successfully executing our diversification strategy, with consistent double-digit profitable growth with enterprise and webscale customers.

Suri also reassured investors that the gross margin decline in the networks business during the quarter is nothing to worry about.

"While our Networks gross margin in Q1 decreased on a year-on-year basis, the primary underlying reasons for that -- regional and product mix -- are largely temporary in nature and expected to improve in the second half of 2018," Suri said. "It is also important to understand that we did not see significant degradation of margins at the overall product level."

Looking forward

While Nokia's first quarter featured a steep decline in revenue and profit, the company's boosted outlook for 2018 suggests that conditions will improve throughout the year. Nokia's long-term view remained unchanged, with demand for 5G network technology expected to drive significant earnings growth by 2020.

The second quarter will likely be weak as well, with Suri indicating that investments related to 5G may be necessary to fuel adoption. The market is expected to accelerate in the second half of the year, with large-scale commercial rollouts starting in 2019.