When Nokia Oyj (ADR) (NYSE:NOK) reported quarterly results in February, the company beat consensus estimates on earnings, but fell short on revenue.
Those numbers were good enough for investors because it demonstrated that management’s restructuring of the company is paying off. The networking division generated better sales than management expected.
Fundamentally, Nokia is more diversified and stronger than its Swedish rival, LM Ericsson (NASDAQ:ERIC). Although its network division is central to the company’s growth strategy, it continues to work with partners to release smartphones. The quarterly report also hinted on the success of Nokia 6, Nokia 8 and Nokia 9 smartphones.
So did Nokia live up to its expectations for the quarter? On April 3, Nokia 9 leaks suggested the company would widen its growth ambitions. Instead of relying on sales in 5G network equipment, Nokia would re-enter the smartphone space through a licensing deal with HMD Global.
NOK Stock Earnings Summary
Nokia reported net sales of $5.88 billion (5.4 billion euros). It made non-IFRS diluted earnings of 3 cents per share. Its diluted per-share loss of nine cents (8 euro cents) is a 3-cent improvement over last year. Nokia’s network business showed a slight decline of 6% in sales. Unsurprisingly, IP and Optical Networks put a drag on results.
Markets already anticipated weakness in this segment. In recent days, shares of Ciena Corporation (NYSE:CIEN) and Oclaro, Inc. (NASDAQ:OCLR) fell. Finisar Corporation’s (NASDAQ:FNSR) weak quarterly report in March and soft outlook triggered a selloff in the sector.
Nokia bucked the negative trend in the Networks sector by reporting gross margin of 39.5% in the quarter. The Mobile Networks division, along with cost-cutting measures and steps to improve operations, contributed to the solid profitability numbers.
Despite any licensing deals in the quarter, Nokia’s acquisition of Withings lifted net sales by 25% year-on-year. It also benefited from higher patent and brand licensing.
Nokia Technologies stood out as the unit having the highest year-over-year change. Revenue grew 25% to $268.8 million (247 million euros). In its press release, the company highlighted its Comptel Corporation acquisition. The unit expands Nokia’s go-to-market capabilities, helped by a sales force that has experience in software and partner network connections.
In effect, Comptel will help Nokia automate more of its network and business operations. This includes customer services and self-optimization. Comptel complements Nokia’s business because the two companies worked together before.
Analysis on First Quarter
Despite expectations that the first quarter would exhibit seasonal weakness, Nokia bucked the trend. The cost cuts are paying off, while the Mobile Networks business is stabilizing. The company did not mention the specific smartphone initiatives. But management clearly expects sales growing in the future.
To offset weakness in IP/Optical Networks and in Fixed Networks, Nokia is building its Application and Analytics business. Sales did not grow year-over-year, but CEO Rajeev Suri expects the unit will deliver improving profitability. The shift for sales from hardware to software will improve profit margin and lift overall results. Once the demand for Optical improves, Nokia’s overall results will improve as well.
Nokia is transition more of its business toward software. The uncertainties in the IP and Optical Networks division will potentially improve, once the communications service providers review their spending budgets for their fiscal year.
In the near term, Nokia’s other businesses will keep NOK stock holders content.
As of this writing, Chris Lau was long NOK stock.