Software unit saves Nokia’s Q1

• Software division makes up for Networks slip 
• Margins are heading in the right direction
• Relative production stability puts vendor on solid ground for 2020 targets

Strong year-on-year sales growth at its Software division helped save Nokia’s first quarter, during which total group revenues dipped slightly but margins improved notably.

Total sales were down by 2% to €4.9 billion, and the company still reported an operating loss of €76 million for an operating margin of -1.5%, but this was a significant improvement from an operating loss of €524 million (-10.4%) a year ago. Nokia is heading in the right direction.

While the Networks (mobile and fixed) division, which accounts for about three quarters of Nokia’s revenues, reported a 5% year-on-year dip in sales to €3.76 billion, the Software unit, which sells applications and mobile core products developed on the company’s cloud native Common Software Foundation (CSF), increased its revenues by 13% to €613 million and also delivered an operating margin of 11.4% compared with a small loss a year ago.  

The vendor’s other main division, Technologies, which generates sales from licensing Nokia’s patents, reported a 6% sales dip to €347 million. 

In the Networks division, mobile access equipment sales were only slightly down from a year earlier, at €2.43 billion: Instead, it was the fixed access equipment business, with sales down 18% to €350 million, IP routing, with sales down 10% to €582 million, and Optical, down just 1% to €395 million, that mainly left the hardware group in the doldrums. 

As ever, communication service providers (CSPs) accounted for the bulk of Nokia’s business (about 83%), with sales down slightly to that group. Revenues from Enterprise customers is on the rise, though, up by 20% compared with the same quarter last year at €311 million. 

Much of the financial report commentary, as you’d expect, relates to 5G and the impact of the Covid-19 pandemic.

In 5G, the vendor says it has 70 commercial deals and has its technology installed in 21 live networks: It has managed to convert all of its 4G network customers to its 5G products except for in China, where Nokia says there are “profitability challenges and unique market dynamics,” with those dynamics leading to its exclusion from the latest 5G radio access network (RAN) deals with the Chinese operators. (It is, though, winning some 5G core action, with outgoing CEO Rajeev Suri telling Reuters that Nokia had landed business with China Unicom.)

The proportion of 5G radio access network (RAN) equipment sales based on its ReefShark system-on-chip continues to increase (at 17% in the first quarter), and the company says it’s on course to have 100% of 5G sales based on ReefShark by the end of 2022. Shifting to its own components will help reduce its product costs and improve margins.  

In terms of the Covid-19 impact, Nokia believes it was little affected in the first quarter, estimating that €200 million in sales were delayed due to supply chain disruptions. It expects the brunt of the impact to hit its business during the current (second) quarter.

Overall, though, the vendor believes it is well placed to weather the current storm: “We are continuing to advance our 5G roadmap and product evolution, as planned, and our COVID-19 mitigation actions in R&D have been very successful. We believe we remain on track with our plans to drive progressive improvement over the course of 2020…. Nokia has a global manufacturing footprint designed for optimized global supply, and to mitigate against risks such as local disruptive events, transportation capacity problems, and political risks. Our supply network consists of 25 factories around the globe and six hubs for customer fulfillment. As a result, we are not dependent on one location or entity. We have also established a global command center to manage the supply chain challenges arising from the outbreak; and we are ready to activate relevant business continuity plans should the situation in any part of our organization require this.”

As a result, Nokia is still providing full year earnings and operating margin guidance of €0.23 and 9% respectively (after one-time costs) to its investors, though it has adjusted those numbers down slightly to account for expected Covid-19 impact.  

This outlook, its margin improvement and its relative stability in such a challenging environment put a smile on investors’ faces as Nokia’s share price gained more than 5% in morning trading to €3.44. 

Nokia, obviously, will be hoping that current trends prevail (though it could do with better performance from the non-mobile parts of its Networks division) and that it doesn’t get dogged down in speculation about potential asset sales or takeovers: Suri will not want to go out on a sour note when he hands over to incoming CEO Pekka Lundmark on 1 September.

- Ray Le Maistre, Editorial Director, TelecomTV