Nokia's stock jumped more than 5% after it reported strong top line and bottom line growth for the second quarter of 2015. The company’s overall revenues increased 9% driven by a 6% rise in
Nokia was able to improve Networks’ margins due to a significant improvement in software sales, a relatively weaker impact of low-margin strategic deals in China and several cost-optimizing initiatives. Going forward, however, Nokia does not expect any further easing of the impact of the China deals and also expects software sales to lose their growth momentum. Therefore Nokia Networks’ margins may come under pressure yet again in Q3 and Q4, though the ongoing cost-cutting initiatives could have an offsetting impact. In fact, the company will need a couple of strong quarters to meet its full-year margin guidance for Nokia Networks, given that margins were at just 3.2% in Q1. In its Q2 earnings call, Nokia said that it still expects Networks’ margins for 2015 to be near the mid point of the 8-11% range.
On the top line front, Nokia Networks continued its strong run in Q2 as well, reporting 6% gains in revenues to EUR 2.73 billion, driven by solid growth in global services (12%) and a moderate increase in mobile broadband sales (3%). By geographies, revenues were up significantly across all markets except Asia-Pacific, where weakness in Japan and South Korea outweighed the sturdy growth in India. Other segments – HERE and Nokia Technologies – continued to post solid top and bottom line gains, concluding another strong quarter for the company.
Our $7.5 price estimate for Nokia is slightly ahead of the current market price. However, we are in the process of updating our model in light of the recent earnings release.
See our complete analysis for Nokia stock here
Networks’ Margins Rebound, But Is It Sustainable?
Nokia Networks’ margins in Q1 (3.2%) were down 610 basis points y-o-y due to weak software sales, strategic entry deals (mainly in China), challenging conditions in the market, a rise in operating expenses and a shift in mix in global services. In the second quarter, the company was able to address a few of these issues, which helped get its profitability back on track. Its software sales were up significantly, growing their share of overall revenues by 400 basis points y-o-y and 500 basis points sequentially. For strategic entry deals, Nokia had previously said that their negative impact on profitability would subside in the second half of the year, but the company was able to achieve the goal in the second quarter instead. On the cost side, Nokia has a total of eight ongoing initiatives that have helped it optimize its cost base to an extent.
Nokia Networks’ operating margins (non-IFRS) have improved substantially from Q1 to Q2, but in order to achieve its annual target, the segment will need even higher margins in Q3 and Q4. The company will have to strive harder to achieve that, given that the impact of China deals is unlikely to subside any further, growth in software sales is expected to slow down in the seasonally weak Q3, the shift in mix of global services is likely to remain a drag and market conditions are likely to remain challenging. However, Nokia can resort to its ongoing cost optimization initiatives in order to sustain the improvement in its margins.
The company believes that its eight strategic initiatives address most of the issues pertaining to the cost base. Nokia is working hard on optimizing its R&D structure to improve productivity, efficiency and cost intensity. It saw some improvements on this front in 2014 and expects to sustain this momentum in the future. Furthermore, Nokia is striving to provide the most efficient delivery model across the various business lines in global services, which can help it generate better margins for the division. Other initiatives related to site strategy, consolidation, supply chain transformation, head count control and IT modernization should also help the company manage its expenses better. Going forward, with better discipline on the cost side, Nokia has the opportunity to offset the impact of the aforementioned challenges.
HERE Is In Advanced Stages Of Strategic Review
HERE, Nokia’s mapping and location intelligence business, saw operational sales grow by 25% y-o-y on the back of rising sales to automobile customers and higher revenue realization from services offered to
According to our estimates, HERE currently contributes less than 3% of the company’s valuation, and with the acquisition of
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