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Nokia Is Off to a Rough Start in 2019

By Timothy Green – Apr 25, 2019 at 10:00PM

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The company will need a strong second half to make up for a dismal performance to start the year.

Nokia (NOK -2.17%) reported its first-quarter results before the market opened on April 25. It was not a good quarter, with some 5G-related revenue pushed back and a surprise net loss. Despite the weak results, Nokia maintained its guidance for both 2019 and 2020. Here's what investors need to know.

Nokia results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Sales

5.03 billion euros

4.92 billion euros

2.2%

Profit

(116 million euros)

83 million euros

N/A

Earnings per share

(0.02)

0.02

N/A

Data source: Nokia. All figures non-IFRS (International Financial Reporting Standards).

What happened with Nokia this quarter?

  • While revenue grew on a reported basis, it declined by 2% year over year on a constant-currency basis.
  • Nokia changed is reporting structure starting in the first quarter. The company's new reporting segments are Networks, Nokia Software, and Nokia Technologies.
  • Networks revenue was up 4% year over year, to 3.94 billion euros. Revenue was flat on a constant-currency basis.
  • Within the networks segment, mobile access revenue was 2.47 billion euros, down 2% at constant currency; fixed access revenue was 426 million euros, down 8% at constant currency; IP routing revenue was 645 million euros, up 12% at constant currency; and optical networks revenue was 400 million euros, up 7% at constant currency.
  • Networks gross margin dropped 790 basis points year over year, to 26.9%. Operating margin fell 760 basis points, to negative 6.4%.
  • Nokia Software revenue was flat compared to the prior-year period, at 543 million euros. Revenue was down 4% at constant currency.
  • Nokia Software gross margin dipped 280 basis points, to 40.3%. Operating margin slumped 150 basis points, to negative 1.3%.
  • Nokia Technologies revenue was up 1% year over year, to 370 million euros. Revenue was flat at constant currency.
  • Nokia Technologies gross margin fell 80 basis points, to 96.5%. Operating margin rose 650 basis points, to 81.6%.
Nokia at Mobile World Congress 2019.

Image source: Nokia.

What management had to say

Nokia CEO Rajeev Suri didn't sugarcoat it in his remarks: "Q1 was a weak quarter for Nokia." Despite the lackluster results, Nokia maintained its full-year guidance.

Suri sees plenty of opportunity for improvement throughout the year:

5G revenues are expected to grow sharply, particularly in the second half of the year, driven by our 36 commercial wins to date. Global services profitability should improve as we recover in a handful of large rollout projects, IP routing is now firmly back to growth given our product leadership, and optical networks continues its long run of growth.

But he also sees increased risks:

In terms of risks, one factor is our slow start to the year. In addition, competitive intensity has slightly increased in certain accounts as some competitors seek to be more commercially aggressive in the early stages of 5G and as some customers reassess their vendors in light of security concerns, creating near-term pressure but longer-term opportunity.

The security concerns Suri is referring to are likely related to Chinese company Huawei.

Looking forward

Nokia kept its guidance for 2019 and 2020 the same, despite a tough first quarter:

  • 2019 non-IFRS earnings per share between 0.25 euros and 0.29 euros, with a non-IFRS operating margin between 9% and 12%.
  • "Slightly positive" recurring free cash flow in 2019.
  • 2020 non-IFRS earnings per share between 0.37 euros and 0.42 euros, with a non-IFRS operating margin between 12% and 16%.
  • "Clearly positive" recurring free cash flow in 2020.
  • Nokia expects to outperform its primary addressable market in 2019 and over the longer term.
  • Nokia expects 2019 to feature a soft first half followed by a robust second half. About 200 million euros of revenue that was unable to be recognized in the first quarter will be recognized before the end of 2019. The delay is related to 5G deliveries primarily in North America.

Nokia expected its first quarter to be weak, but not quite this weak. Poor first-quarter results add to the pressure for Nokia to execute in the second-half of the year, which already needed to be strong for the company to hit its guidance.

Another setback in the second quarter could derail the company's full-year outlook and raise some questions about its longer-term outlook.

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.

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