Nokia Q1 Earnings Preview: Watching Cost Improvements As Demand Weighs On Revenue

Nokia ( NOK ) will announce its Q1 earnings on April 27. In Q4, the company’s top line declined by 10% on a non-IFRS combined company (after Alcatel Lucent’s acquisition) basis, as investments in 4G networks peaked in 2015 and have headed downwards since then. However, the company managed to expand its gross margins by 80 bps as it saved EUR 200 million on its cost of sales.

For Q1, Ericsson’s results provided a glimpse into network market conditions, which has continued to disappoint. Therefore, we can expect a similar negative impact on Nokia’s top line as well. However, on a positive note, Nokia has been consistently partnering with telecom operators around the world to construct a base for its 5G technology. Apart from this, it will be worth noting if Nokia can report any improvements in the operating margins as the company has been focused on reducing its operational costs after the Alcatel Lucent acquisition.

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Top Line Likely To Suffer, But Nokia Managed Some New Partnerships

As there is a time gap between the peak of 4G investments and the roll out of 5G, there has been a corresponding gap in investments which has put pressure on network infrastructure companies’s revenues. Ericsson recently released its Q1 earnings and missed revenue expectations as a result of the aforementioned pressure. While Nokia has performed better recently both in terms of its top line and bottom line, but it too will likely see an impact from the slowdown in the addressable networks market, which is expected to fall again in 2017.

But keeping in mind its future prospects, Nokia continued to build its partnerships with various telecom operators during Q1, either for testing of new technology (4.5G, 4.5G pro and 4.9G) or to provide core optical to operators in emerging markets who are still investing in expanding 4G connectivity. For instance, it closed deals with Reliance Jio in India and MobiFone in Vietnam to provide them with 100G core optical fibers. To test its latest technology, it has partnered with Ooredoo Qatar and Zain Saudi Arabia, to name a few.

Cost Savings Offsetting Revenue Pressure

To protect its bottom line from the adverse market conditions, Nokia aims to save 1.2 billion Euros in costs by 2018, 800 million from operating expenses and 400 million from cost of sales. Out of this, it already achieved 550 million in FY’16.

While Nokia’s gross margin grew in FY’16, its non-IFRS operating margin fell by 180 bps. After the Alcatel Lucent acquisition, Nokia’s average headcount almost doubled to around 102,000, but management has indicated that it will reduce headcount substantially to bring operational expenses under control.

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