Nokia Corporation (NOK - Free Report) reported impressive fourth-quarter 2019 results, wherein the bottom line and the top line surpassed the respective Zacks Consensus Estimate, and increased year over year.
In 2019, the company saw good progress in its focus areas of enterprise and software. Nokia Enterprise delivered well on its target of double-digit sales growth. Nokia Software showed its long-term promise, with profitability expansion compared to 2018. IP Routing continued its remarkable momentum, gaining significant share and increasing profitability in a difficult market, and Nokia Technologies continued to generate robust profitability.
Reported profit for the December quarter was €563 million or €0.10 per share compared with €203 million or €0.03 per share in the year-ago quarter. The improvement was mainly driven by progress related to Nokia’s cost savings program, lower transaction and integration costs, a net positive fluctuation in financial income and expenses, lower income taxes and a net positive fluctuation in other income and expenses. However, the momentum was partly offset by lower gross profit due to its business performance. For 2019, profit was €18 million against loss of €549 million in 2018.
Quarterly non-IFRS profit came in at €821 million ($908.9 million) or €0.15 (17 cents) per share compared with €741 million or €0.13 per share in the prior-year quarter. This reflects progress in cost savings, which resulted in lower operating expenses across Networks, Nokia Software and Nokia Technologies. The bottom line surpassed the Zacks Consensus Estimate by 4 cents.
Nokia Corporation Price, Consensus and EPS Surprise
On a reported basis, net sales for the quarter grew 0.5% year over year to €6,903 million. This reflects improved overall industry demand and particularly strong growth with enterprise customers, driven by increased demand for mission-critical networking solutions.
While net sales increased in Asia-Pacific, Latin America, and Middle East & Africa (up 16.3%, 3.3% and 9.8%, respectively), it declined in Europe, North America and Greater China (down 1.1%, 2.6% and 24.6%, respectively). For 2019, net sales increased 3.3% year over year to €23,315 million.
Fourth-quarter non-IFRS net sales were €6,903 million ($7,642.4 million) compared with €6,872 million in the prior-year quarter. The top line surpassed the consensus estimate of $7,381 million.
Quarterly Segment Results
Net sales at Networks (which accounts for the lion’s share of total revenues) increased 3.1% year over year to €5,439 million ($6,021.6 million). The performance was driven by Optical Networks, IP Routing and, to a lesser extent, Mobile Access. The segment’s gross margin fell 210 basis points (bps) to 34.2%. Operating margin increased 250 bps to 12.3%.
The growth in Optical Networks was primarily due to the timing of completions and acceptances of certain projects, with strong growth in Europe and North America. The growth in IP Routing was primarily due to Nokia’s market-leading portfolio, with strong growth in North America. The slight growth in Mobile Access was primarily due to 5G radio technologies and network deployment services, partly offset by a decrease in 4G and other legacy radio technologies.
Net sales at Nokia Software were down 7.2% year over year to €870 million ($963.2 million). This was in comparison to a strong fourth-quarter 2018, especially in North America and India, within Asia-Pacific. The segment’s gross margin grew 90 bps to 59.7%. Operating margin declined 60 bps to 34.9%.
Net sales at Nokia Technologies were down 11.1% year over year to €376 million ($416.3 million), primarily due to lower one-time licensing net sales which amounted to about €20 million in fourth-quarter 2019 and €70 million in the year-ago quarter. While the segment’s gross margin declined 10 bps to 99.2%, its operating margin increased 310 bps to 85.1%.
In Group Common and Other, net sales declined 10.1% year over year to €231 million ($255.7 million). This was primarily due to Radio Frequency Systems, partly offset by growth in Alcatel Submarine Networks. The decrease in Radio Frequency Systems was due to temporary capital expenditure constraints in North America related to customer merger activity and the absence of a large customer rollout, which benefited fourth-quarter 2018. The growth in Alcatel Submarine Networks was led by the ramp-up of new projects. The segment’s gross margin was 3.5%, down 780 bps.
Overall non-IFRS cost of sales increased to €4,144 million from €3,957 million in the year-ago quarter. Non-IFRS gross profit declined 5.4% year over year to €2,759 million. Non-IFRS operating profit was €1,134 million compared with €1,120 million in the year-ago quarter.
Nokia inked 15 5G commercial contracts in the reported quarter, highlighting momentum across markets. Currently, it has 66 commercial 5G deals and 19 live networks, and more than 100 5G agreements.
Cash Flow & Liquidity
In 2019, Nokia generated €390 million of net cash from operating activities compared with €360 million in 2018. As of Dec 31, 2019, the Finnish telecom gear maker had €5,910 million ($6,627.9 million) in cash and equivalents with €3,985 million ($4,469.1 million) of long-term interest-bearing liabilities compared with the respective tallies of €6,261 million and €2,826 million a year ago.
For 2020, Nokia expects non-IFRS earnings per share of €0.25 (+/- 5 cents). Non-IFRS operating margin is estimated to be 9.5% (+/- 1.5 percentage point). The company expects long-term (3 to 5 years) non-IFRS operating margin between 12% and 14%.
In Mobile Access, the company expects improvement to be driven by increasing shipments of its “5G Powered by ReefShark” portfolio, product cost reductions, better commercial management, and strong operational performance in services.
Zacks Rank & Stocks to Consider
Nokia currently has a Zacks Rank #4 (Sell).
A few better-ranked stocks in the broader industry are Splunk Inc. (SPLK - Free Report) , Anaplan, Inc. (PLAN - Free Report) and Appian Corporation (APPN - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Splunk topped earnings estimates in the trailing four quarters, the surprise being 74.3%, on average.
Anaplan surpassed earnings estimates in the trailing four quarters, the beat being 28.8%, on average.
Appian topped earnings estimates thrice in the trailing four quarters, the positive surprise being 15.1%, on average.
Conversion rate used:
€1 = $1.107119 (period average from Oct 1, 2019 to Dec 31, 2019)
€1 = $1.121473 (as of Dec 31, 2019)
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