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Nokia Corporation's Sales Slump on Mobile Networks Weakness

By Timothy Green - May 11, 2016 at 8:12AM

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The telecommunications infrastructure company has now officially completed its acquisition of Alcatel-Lucent, but a challenging environment is causing problems.

Nokia (NOK 3.00%) reported its first-quarter results before the market open on Tuesday, May 10. The company's acquisition of Alcatel-Lucent is now complete, and Nokia raised its goal for cost synergies related to the acquisition. Here's what investors need to know about Nokia's results.

The raw numbers

Metric

Q1 2016

Q1 2015

YOY Growth

Sales

5.60 billion euros

6.13 billion euros

(9%)

Profit

139 million euros

184 million euros

(24%)

EPS

0.03 euros

0.05 euros

(40%)

All figures non-IFRS (non-international financial reporting standards). Q1 2015 figures combine Nokia and Alcatel-Lucent results. YOY=year over year. Data source: Nokia Q1 2016 earnings report.

What happened with Nokia this quarter

Weakness in Nokia's mobile networks business was responsible for much of the company's revenue decline.

  • Nokia's Networks revenue declined by 8% year over year. This decline was driven by a 12% slump in ultra broadband networks revenue, which was primarily the result of weakness in mobile networks.
  • Nokia Technologies suffered a 27% year-over-year decline. Excluding the effects of various items during the first quarter of 2015, sales rose by 10% because of higher intellectual property licensing volume.
  • Nokia's acquisition of Alcatel-Lucent is now complete. The company plans head-count reductions as part of its global synergy and transformation program, largely in areas where there are overlaps between Nokia and Alcatel-Lucent. These head-count reductions will occur between now and the end of 2018.

Now that the acquisition is complete, Nokia provided various pieces of guidance.

  • Nokia expects annual operating cost synergies of at least 900 million euros by 2018. Previous guidance called for approximately 900 euros.
  • Nokia's Networks business is expected to post a year-over-year decline in non-IFRS revenue during 2016. Non-IFRS operating margin expected to be above 7%.
  • Sales guidance for Nokia Technologies wasn't provided, because of uncertainties in the timing and value of significant licensing agreements.

What management had to say

Nokia President and CEO Rajeev Suri reiterated the company's view that headwinds in the wireless sector would persist this year:

I am pleased that we were able to deliver solid profitability in what is typically a seasonally weak quarter and at a time when the risk of integration-related disruption was high. While our revenue decline was disappointing, the shortfall was largely driven by Mobile Networks, where the challenging environment is not a surprise. We noted in our Q4 2015 earnings release that we expected some market headwinds in 2016 in the wireless sector and we continue to hold that view today.

Suri also gave investors an update on the progress of the Alcatel-Lucent integration:

"While integrations of the scale of Alcatel-Lucent are complex and take time, we are now sufficiently confident in our progress that we are targeting synergies that are both more than and faster than our original plan. We already have agreed transition plans that cover the most pressing areas of portfolio overlap with most of our top customers; have begun the process of reducing overlapping personnel including initial reductions in the United States and several other countries; started to consolidate our real estate footprint with several sites already closed and 30 more scheduled for the current quarter; and completed 40 projects with suppliers to drive procurement savings, with 200 more projects currently under way and plans for hundreds of additional projects to be launched largely over the course of Q2 2016."

Looking forward

Headwinds in the Networks business, which led to the decline in Nokia's first-quarter revenue and weak guidance for 2016, led the stock to drop by about 6.7% on the day results were announced. On a non-adjusted basis, Nokia reported a 613 million euro loss, with the discrepancy due to various exclusions such as the amortization of intangible assets and the valuation of deferred revenue and inventory related to the acquisition of Alcatel-Lucent.

Going forward, the complicated integration of Alcatel-Lucent will have a lot of moving parts, and investors should keep an eye on the company's progress achieving its cost synergy goal.

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