Sales declined in all 6 regions but profit still beat expectations
Nokia (NOK) Beats Q2 Earnings Estimates, Raises 2020 Outlook
Zacks Equity Research July 31, 2020
Nokia Corporation (NOK - Free Report) reported healthy second-quarter 2020 results, with the bottom line beating the Zacks Consensus Estimate. The Finland-based telecom equipment maker delivered better-than-expected profitability and improvement in cash generation despite the coronavirus-induced challenges.
Reported profit (from continuing operations) in the June-end quarter was €85 million or €0.01 per share against a loss of €191 million or loss of €0.03 per share in the year-ago quarter.
Non-IFRS profit came in at €316 million ($347.8 million) or €0.06 (7 cents) per share compared with €258 million or €0.05 per share in the prior-year quarter. The upside was driven by higher gross profit in Mobile Access within Networks, progress related to cost-savings program and a net positive fluctuation in financial income and expenses. However, the momentum was partially offset by higher investments in 5G R&D to accelerate product roadmaps and cost. The bottom line beat the Zacks Consensus Estimate by 4 cents.
On a reported basis, net sales in the quarter dropped 10.6% year over year to €5,092 million. This was caused by the coronavirus crisis and unique dynamics in China. The company estimates that COVID-19 had an almost €300 million negative impact on sales.
Net sales declined in all the six regions on a year-over-year basis — the Middle East & Africa, North America, Europe, Asia-Pacific, Greater China and Latin America (down 9%, 2%, 2%, 13%, 41% and 41%, respectively).
Second-quarter non-IFRS net sales were €5,093 million ($5,606 million) compared with €5,696 million in the prior-year quarter. The top line lagged the consensus estimate of $5,632 million.
Sales in Networks (which accounts for the lion’s share of total revenues) fell 10% year over year to €3,955 million. This was primarily due to Mobile Access and, to a lesser extent, IP Routing, Optical Networks and Fixed Access. The decrease in Mobile Access was due to decreases in network deployment services and legacy radio technologies, partially offset by strong growth in 5G. The segment’s gross margin surged 450 basis points (bps) to 35.6%. The operating margin increased 360 bps year over year to 6.3%.
Sales in Nokia Software were down 11.9% year over year to €597 million. This was in comparison to a particularly strong second-quarter 2019, which benefited from the timing of completions and acceptances of certain projects. The company progressed against its strategy to strengthen the business, supported by strong execution and the comprehensiveness of its portfolio. The segment’s gross margin fell 230 bps to 50.4%. The operating margin declined 550 bps to 14.7%.
Sales in Nokia Technologies dropped 11% year over year to €341 million. This was due to lower one-time net sales, reduced brand licensing sales as well as lower patent licensing sales due to the expiration of some small patent licensing agreements. One-time net sales amounted to around €10 million in second-quarter 2020 and €30 million in the year-ago quarter. The segment’s gross margin improved 70 bps to 99.4%. Operating margin fell 190 bps to 82.7%.
In Group Common and Other, sales declined 20.2% year over year to €210 million. This was primarily due to Radio Frequency Systems and, to a lesser extent, Alcatel Submarine Networks. The downtick in Radio Frequency Systems was due to lower sales of remote radio head cables as well as lower sales to a number of customers in North America. Fall in Alcatel Submarine Networks was due to factory closures as a result of COVID-19, almost entirely offset by the ramp-up of new projects. The segment’s gross margin was a negative 15.2%, down 2,090 bps.
Overall, non-IFRS cost of sales fell to €3,076 million from €3,579 million in the year-ago quarter. Non-IFRS gross profit dropped 4.7% year over year to €2,017 million, attributable to lower gross profit in Nokia Software and a gross loss compared to a gross profit in Group Common. Non-IFRS operating profit was €423 million compared with €451 million in the year-ago quarter, driven by lower non-IFRS gross profit and a net negative fluctuation in Nokia’s venture fund investments.
Cash Flow & Liquidity
In the first half of 2020, Nokia generated €467 million of net cash from operating activities against a cash utilization of €1,663 million in the year-ago period. As of Jun 30, the company had €7,088 million ($7,958.5 million) in cash and cash equivalents with €5,181 million ($5,817.3 million) of long-term interest-bearing liabilities compared with the respective tallies of €4,693 million and €3,949 million a year ago.
Nokia raised its outlook for 2020. The company now expects non-IFRS earnings per share of €0.25 (+/- 5 cents), adjusted from an earlier expectation of €0.23. Non-IFRS operating margin is estimated to be 9.5% (+/- 1.5 percentage points), changed from an earlier expectation of 9%. The company continues to expect a long-term (3 to 5 years) non-IFRS operating margin between 12% and 14%.
Conversion rate used:
€1 = $1.100720 (period average from Apr 1, 2020 to Jun 30, 2020)
€1 = $1.122819 (as of Jun 30, 2020)
Zacks Rank & Other Stocks to Consider
Nokia carries a Zacks Rank #2 (Buy), at present.
Some other top-ranked stocks in the broader industry are Turtle Beach Corporation (HEAR - Free Report) , T-Mobile US, Inc. (TMUS - Free Report) and Clearfield, Inc. (CLFD - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Turtle Beach has a trailing four-quarter earnings surprise of 46.4%, on average.
T-Mobile has a trailing four-quarter earnings surprise of 19.4%, on average.
Clearfield has a trailing four-quarter positive earnings surprise of 45.6%, on average. The company’s earnings beat the Zacks Consensus Estimate in two of the last four quarters.