Nokia (NOK) Tops Q2 Earnings Estimates, Networks View Dull

Nokia (HE:NOKIA) Corporation’s (NYSE:NOK) second-quarter 2017 earnings per share of €0.08 (approximately 9 cents) beat the Zacks Consensus Estimate of 4 cents. In the year-ago period, the company had reported earnings of €0.03 (4 cents) per share.

Net sales declined year over year (on a comparable combined company basis) to €5.6 billion (approximately $6.18 billion). The top line surpassed the Zacks Consensus Estimate of $5.98 billion but fell short of the year-ago figure of approximately $6.31 billion. This was because revenues were hurt by the Nokia Networks’ disappointing performance. Also, weakness in the Ultra Broadband Networks subgroup contributed to the soft results posted by Nokia’s flagship division.

Quarterly adjusted gross margin was 41.7% in the reported quarter compared with 38.9% a year ago. Operating margin increased 430 basis points (bps) to 10.2% on a year-over-year basis.

In fact, at quarter-end, Nokia’s net cash from operating activities was €1,309 million against - €616 million at the end of the year-ago quarter.

Segmental Revenues

In the Nokia Networks segment, total revenue was approximately €4,971 million (around $5,467 million), down 5% year over year. The division includes three reportable sub-units like Ultra Broadband Networks (which includes Mobile Networks and Fixed Networks operations), Global Services (which includes the Global Services business group) and IP Networks and Applications (which includes the IP/Optical Networks and Applications & Analytics operations). Notably, the decline in the Ultra Broadband Networks’ sub-group by 8% to €2,165 million hurt the segmental sales.

In fact, net sales declined in all regions, apart from Asia Pacific (5%) and Middle East and Africa (5%), which led to the segment’s below-par performance. The same declined by 16% in Latin America, 7% each in North America and Greater China, and 10% in Europe.

However, segmental gross margin improved 150 bps to 39.1% in the reported quarter. Also, quarterly operating margin was 8.2% compared with 6% a year ago.

The Nokia Technologies segment’s quarterly total revenue was €369 million (approximately $406 million), up 90% year over year. Segmental gross margin was 95.4% compared with 96.4% in the year-ago quarter. Operating margin expanded significantly to 62.3%.

Segmental results were aided by Nokia’s licensing and business partnership deal with Apple Inc. (NASDAQ:AAPL) . Following the deal, Nokia received an upfront cash payment from Apple in the reported quarter.

In Group Common and Other segment, net sales increased 14% to €307 million (approximately $338 million). Segmental gross margin was 17.6%, down 170 basis points. In fact, this division incurred an operating loss in the quarter under review.

Outlook

Nokia officially took control of rival Alcatel-Lucent (PA:ALUA) in Jan 2016, and continues to expect annual cost savings of €1.2 billion in full-year 2018, excluding Nokia Technologies.

For 2017, capital expenditure outlook for this Zacks Rank #3 (Hold) company is approximately €500 million. Non-IFRS tax rate is now expected in the range of 25% to 30% in 2017 (old guidance: 30% to 35%). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company anticipates net sales in its primary networks division to decline in 2017, which is in line with the primary addressable market. However, the market conditions are expected to be more challenging than expected earlier.

Consequently, the primary addressable market for Nokia’s main unit is now expected to decline in the band of 3% to 5% as opposed to the earlier projection of a fall in the low-single digits. Segmental operating margin is still forecasted to be in 8% to 10% range.

Our Key Releases Coming up

Investors interested in the Computer and Technology sector will now look forward to the second-quarter earnings reports of Harris Corporation (NYSE:HRS) and Citrix Systems (NASDAQ:CTXS) . While Harris is scheduled to report results on Aug 1, Citrix Systems will unveil its earnings report on Aug 2.

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