Nokia Oyj (ADR) (NYSE:NOK) is once again proving that its business transition is moving the company in the right direction. The Finnish communications equipment provider reported a moderating in its revenue slowdown. In the first quarter, weakness in the Network division lessened compared to the previous quarter. Conversely, software sales and patent/licensing revenue are becoming more strategically significant for the company.
If integration efforts highlighted Nokia’s 2016 year, then 2017 is the year it executes and performs. In the first quarter, the rate of sales decline slowed. Revenue topped $5.94 billion (EUR 5.4 billion), down 4% from the previous year.
The company is winning larger deals and getting better at cross-selling solutions to customers. Management aims to cut $110 million in costs this year and $1.32 billion for the full year 2018.
Nokia’s Profitability Improving
Nokia offset the weakness in IP/Optical Networks by delivering gross margin of 39.5% in the Network unit. By expanding sales and selectively targeting vertical markets, Nokia pitched software solutions to customers. This created new business opportunities and lifted profitability. Earlier this year, the company introduced its 5G mobile network solutions to the world. When it comes time for operators to upgrade from 4G, chances are good that customers will consider Nokia’s 5G offering. Nokia already won business from companies in Mexico, Latin America, and three wins in the United Kingdom.
Despite weakness in the routing business in the reported quarter, Nokia plans to turn things around. Management promises to refresh products. This will help the company win market share starting the middle of this year. Overall, Nokia forecast operating margin of 8% to 10% for its Networks business for the full year.
Software and IP
Software is a critical component to NOK’s growth strategy. Its acquisition of Comptel for $370 million widens its offerings by filling in gaps. Sales at Nokia Technologies grew 25%. One-third of the sales growth is due to a new, one-time licensing agreement.
The company is excluding any revenue from Apple Inc. (NASDAQ:AAPL) since the licensing agreement between the two expired at the end of last year. The litigation involving the alleged infringement of 32 patents will cost $110 million annually in legal costs.
Nokia reiterated its dividend payout will return around $1.1 billion to shareholders. It is repurchasing around $800 million of its short-dated notes. Nokia bought back nearly $500 million of the $1.1 billion in shares the company planned to buy back.
Risks for NOK Stock
Slowing activity in China may delay project opportunities for Nokia. China Unicom sharply lowered its capital expenditures. On its conference call, the CEO said:
“China is probably even incrementally a little bit worse because China Unicom announced a big CapEx reduction, as you might have seen. Even though there’s possible partial offsets in China Mobile potentially available.”
Still, Nokia may offset the weakness in this region by doing more business in other areas like North America, Japan and Korea.
Takeaway on Nokia
Nokia is a company in transition. While it is selling impressive phones, through partnerships, including a rumored one with Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), profit growth will come from IP licensing and software sales. The company is stabilizing its network division by cutting costs and aiming for bigger deals with customers. A slower but more focused Nokia will attract investors looking for dividend and safety.
As of this writing, Chris Lau held a position in NOK stock.