Filed under: Nokia, Earnings, Telecommunications
The former mobile phone leader globally, Nokia sold its handset business to Microsoft in April and now focuses on telecommunications, navigation systems, and licensing and innovation in the mobile business.
Since it sold its mobile phone business to Microsoft, the company has focused on a cost-cutting program.
Nokia reported 13 percent revenue growth in its Networks business, beating third quarter Wall Street hopes and leading it to forecast a rosier financial performance for the rest of the year.
This earnings release follows the earnings announcements from the following peers of Nokia: Ericsson (ERIC), Huawei, Apple (AAPL), BlackBerry (BBRY), Microsoft (MSFT) and Amazon (AMZN).
Highlights
- Summary numbers: Revenues of $4.36 billion, Net Earnings of $461.1 million and Earnings Per Share (EPS) of $0.12.
- Performance focus on earnings: same period compared to last year change in earnings of 480.0 percent, better than decline in company-wide revenues of 42.5 percent.
- Revenue growth of 13.0 percent in Nokia's Networks business segment.
- Gross margins now 69.7 percent from 33.9 percent compared to the same period last year.
- Operating margins (EBITDA margins) now 13.8 percent from 3.9 percent.
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):
| Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | |
| Revenue Growth (YOY) | -17.2% | -54.7% | -52.6% | -45.6% | -42.5% |
| Earnings Growth (YOY) | 90.1% | -8.8% | 141.3% | 87.0% | 480.0% |
| Net Margin | -1.6% | 5.1% | 4.1% | -1.0% | 10.6% |
| EPS | -$0.03 | -$0.01 | -$0.08 | $0.84 | $0.12 |
| Return on Equity | -4.7% | 10.4% | 6.6% | -1.6% | 18.3% |
| Return on Assets | -1.4% | 2.7% | 1.8% | -0.5% | 6.5% |
Market Share Versus Profits
Profits sometimes come at the expense of market share, and vice versa. Capital Cube looks at revenue and sales growth to understand a company's ability to grow its market share, and earnings or net income growth to look at the company's ability to generate profits.
Nokia's full-company decline in revenue compared to the same period last year of -42.5 percent underperformed its change in earnings, which rose 480 percent. The company's performance this period suggests an effort to boost bottom-line profits. While this is good to a point, the fact that the company's top-line performance is less than average among the announced results thus far in its sector may not bode well from a long-term market share perspective. Also, for comparison purposes, from July through September, revenues changed by 7.5 percent and earnings by 1,299.0 percent.
Earnings Growth Analysis
The company's earnings growth has been influenced by the following factors: (1) Improvements in gross margins from 34.0 percent to 69.7 percent from the year earlier period, and (2) better cost controls. As a result, operating margins improved from 3.9 percent to 13.9 percent so far this year. In the second quarter, on the other hand, gross margins were a loftier 45.9 percent and EBITDA margins 12.9 percent.
EPS Growth Versus Earnings Growth
Nokia's change in Earnings per Share (EPS) of 540.5 percent compared to this time last year surpassed its change in earnings of 480 percent. At the same time, it is worth noting that its change in earnings performance beat the average change of the announced results thus far of its peer group, suggesting that the company is gaining more ground in generating profits among this group.
Gross Margin and Efficiency Trend
Companies sometimes offer easier terms to customers and vendors even if it means lower revenues and margins. Capital Cube probes for this by comparing the changes in gross margins with any changes in working capital. If the gross margins rose without working capital going down, the company's performance might be a result of truly delivering in the marketplace, and not simply an accounting prop using the balance sheet.
The company's improvement in gross margins have come at the expense of a deterioration in working capital management, suggesting that some of the improvements in gross margins are not from operating decisions but rather accounting trade-offs with the balance sheet. Its working capital days have risen to 182.3 days from last year's levels of 62.4 days.
Supporting Data
The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
| Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | |
| Revenue Growth (YOY) | -17.2% | -54.7% | -52.6% | -45.6% | -42.5% |
| Peer Average Revenue Growth (YOY) | 4.3% | 5.3% | -0.3% | 6.5% | 12.7% |
| Earnings Growth (YOY) | 90.1% | -8.8% | 141.3% | 87.0% | 480.0% |
| Peer Average Earnings Growth (YOY) | 17.4% | 0.0% | 7.1% | 12.3% | 12.7% |
| Operating Cash Flow Growth (YOY) | 179.2% | -68.5% | -154.8% | -239.6% | N/A |
| Peer Average Operating Cash Flow Growth (YOY) | -4.0% | -10.3% | 7.6% | 14.0% | 11.1% |
| Gross Margin | 33.9% | 44.7% | 48.8% | 45.9% | 69.7% |
| Peer Average Gross Margin | 33.9% | 41.7% | 48.8% | 45.9% | 58.0% |
| EBITDA Margin | 3.9% | 11.9% | 12.1% | 12.9% | 13.7% |
| Peer Average EBITDA Margin | 4.8% | 11.9% | 24.2% | 19.6% | 15.5% |
| Net Margin | -1.6% | 5.1% | 4.1% | -1.0% | 10.6% |
| Peer Average Net Margin | -0.2% | 5.1% | 4.1% | 2.4% | 10.6% |
| EPS | -$0.03 | -$0.01 | -$0.08 | $0.84 | $0.12 |
| Peer Average EPS | -$0.03 | $0.51 | $0.23 | $0.55 | $0.12 |
| Return on Equity | -4.7% | 10.4% | 6.6% | -1.6% | 18.3% |
| Peer Average Return on Equity | -1.8% | 10.4% | 6.6% | 2.5% | 18.3% |
| Return on Assets | -1.4% | 2.7% | 1.8% | -0.5% | 6.5% |
| Peer Average Return on Assets | -0.5% | 2.7% | 1.8% | 1.3% | 6.5% |
Company Profile Nokia provides network infrastructure, technology and software services. The company operates through three businesses: Networks, HERE and Technologies. The Networks business consists of Mobile Broadband and Global Services units. The Mobile Broadband unit provides mobile operators with radio and core network software together with the hardware needed to deliver mobile voice and data services. The Global Services unit provides mobile operators with a broad range of services, including network implementation, care, managed services, network planning and optimization, as well as systems integration. The HERE business focuses on the development of location intelligence, location-based services and local commerce. The Technologies business focuses on technology development and intellectual property rights activities. Nokia was founded in 1967 and is headquartered in Espoo, Finland.
CapitalCube does not own any shares in the stocks mentioned and focuses solely on providing unique fundamental research and analysis on approximately 50,000 stocks and ETFs globally. Try any of our analysis, screener or portfolio premium services free for 7 days. To get a quick preview of our services, check out our free quick summary analysis of NOK.
