Nokia Sticks to Its Full-Year Targets

Nokia (NOK -0.27%) reported its third-quarter results before the market opened on Oct. 25. Sales grew slightly on a currency-adjusted basis, and the company maintained its full-year guidance despite a steep profit decline. Here's what investors need to know.

Nokia results: The raw numbers

Data source: Nokia. All figures non-IFRS.

What happened with Nokia this quarter?

• Adjusted for currency, Nokia's revenue increased by 1% year over year.
• Nokia's networks revenue rose 1% year over year, to 4.89 billion euros. Adjusted for currency, revenue was up 3%. Within the networks segment, ultra-broadband networks revenue rose 1%, to 2.13 billion euros, global services revenue rose 2%, to 1.38 billion euros, and IP networks and applications revenue rose 1%, to 1.38 billion euros.
• Networks gross margin slumped 270 basis points year over year, to 35.9%. Operating margin fell 190 basis points, to 5%. The company blamed price erosion exceeding cost erosion in the ultra-broadband networks business for part of the segment's gross margin decline.
• Nokia Technologies revenue tumbled 27% year over year, both as reported and adjusted for currency, to 351 million euros. Gross margin rose 180 basis points, to 99.7%, while operating margin jumped 190 basis points, to 82.6%.
• The company blamed the absence of 180 million euros of non-recurring catch-up licensing revenue, which was present in the third quarter of 2017, for the sales decline.
• HMD Global, Nokia's brand licensee for mobile devices, launched the Nokia 6.1 Plus and Nokia 5.1 Plus during the quarter. HMD also announced that it would double its manufacturing capacity in India to support demand for Nokia-branded phones.

Nokia provided the following guidance:

• Non-IFRS operating margin between 9% and 11% for 2018 and between 12% and 16% for 2020 -- unchanged from the previous outlook.
• 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 -- unchanged from previous outlook.
• Earnings growth through 2020 will be driven in part by a new 700 euro cost-reduction plan announced along with the third-quarter results.
• Nokia still sees the networks business outperforming its primary addressable market in 2018 and over the long run.
• Guidance for the networks and the technologies businesses remain unchanged.

Image source: Nokia.

What management had to say

Nokia CEO Rajeev Suri laid out some risks that will arise in the fourth quarter during the earnings call: "We see some risks as we head to the end of this year with project timing and product deliveries. The orders are certainly there, but we are facing a heavy workload in the fourth quarter, given the scale of the rollouts under way."

Suri also discussed the company's new cost-savings plan: "Earlier this year, when we first shared our 2020 guidance, I noted that we saw the opportunity to further reduce costs even after the end of this year when we expect to successfully deliver on our 1.2 billion euros cost savings plan related to our Alcatel-Lucent acquisition. We have now quantified those future actions and are targeting EUR700 million in annual cost savings by the end of 2020."

Looking forward

Nokia maintained its full-year guidance despite an earnings decline in the third quarter and risks related to project timing and product deliveries in the fourth quarter. In the longer term, the company stands to benefit from the rollout of 5G technology. Nokia's 2020 guidance is based on expected growth in the company's addressable market, driven in part by commercial 5G deployments.

Given that margins fell in the networks business through the first nine months of the year, Nokia is going to need a solid fourth quarter to hit its full-year targets.