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What happened? Nokia''s CEO Justin Hotard hosted a webcast presentation today after European market close. While there were no major announcements the presentation (unsurprising given results 6 weeks away and CMD 2 months away) still gives some sense of how management are currently looking at the business. The ADR is down ~1% at time of writing, down marginally from when presentation kicked off. We recently wrote an indepth report on Nokia and summarise our key points below. BNPP Exane View: . Main focus is AI data centre growth in Network Infrastructure. Nokia clearly sees an opportunity to grow materially on the back of AI data centre investments by hyperscalers. Nokia flagged 3 areas of growth: 1) subsea, 2) intra-data centre; 3) moving into the data centre with pluggables. Nokia did not give any quantification beyond the 5% revs coming from AI DC in Q2 25 (previously disclosed) and that its revs would have grown 10% if it had not been for supply constraints (ditto), though it noted it expected to continue to see a strong book-to-bill. In terms of where it saw major differentiation it flagged photonic integrated circuits as a particular opportunity. Regarding supply chain constraints it said these would likely remain in place at industry level (given high demand - presumably suggesting not immediately snapping back) but also flagged that it was building out its own fabs (albeit not ''billion euro fabs''). On the IP DC side Nokia was more moderate in terms of its ambitions (''a longer journey''), which reflects its historic focus on (lower growth) telcos and strong existing players. Net-net we see AI-related growth as likely to be the big focus at the CMD on 19 Nov and we believe the key for the stock will be sizing how much incremental revenue AI DC investment could drive at Nokia (on the traditional fixed side Nokia was also positive about the OBBA and an upgrade cycle). . MN focus on profitability. Nokia''s CEO described mobile equipment as being...
Nokia Oyj
Nokia cut FY25 guidance earlier this week and reported a miss in Q2 25 with weak Q3 25 guidance. While disappointing we believe this also helps lower the bar ahead of the CMD. What did we learn that we did not know last week? 1. Phasing heavily skewed to Q4 25. Nokia Q2 25 EBITDA of EUR0.3bn and Q3 25 guidance pointing to EUR0.3bn suggests that Q4 25 needs to be strong (EUR0.9-1.2bn). The order book at this point does not cover this Q4 25 (as is normal given turns nature of NI) 2. Several items should help later in year. Q4 25 should benefit from more hyperscaler revs in optical, supply constraints easing, Infinera synergies and perhaps India mobile recovery. 3. Margin mix effects. MN margin was strong thanks to low India mix and high software. NI margin was low due to high CPE mix. Q3 25 is likely to be the other way around. 4. Upside risk from US telco capex announcements. The BBB appears to be driving increased fibre capex amongst some US telcos and this should help drive higher NI revs for Nokia. Nokia also suggested that European telcos'' fibre spend could pick up again as the sector''s health improves. Has our investment thesis changed? No We have long been sceptical about the outlook for Nokia''s mobile business which we see as subscale, and with a big revenue miss this view remains intact. NI has more optionality with the pivot into AI but there remains high execution risk both near term (can Nokia generate enough Q4 25 EBIT to hit mid point of guide?) and longer term (how effective and costly will the AI pivot in optical be?). We expect an update on both at the November CMD. Changes to estimates Nokia cut guidance earlier this week to reflect FX and (minor) tariff effects. We cut FY26 EPS 8% and trim our ord/ADR TP by 2%/4%. We continue to prefer Nokia over Ericsson.
What happened? Nokia''s 2Q25 earnings call just concluded (for more on earnings see: Q2 25 results release slightly reassuring vs earlier warning). The shares are roughly flat. We highlight the three key points from the call below. BNPP Exane View: . Q4-weighted FY25. Nokia Q2 25 was well below consensus and the guide for Q3 25 for flat rev/margin implies around ~EUR300m operating profit vs Bloomberg cons ~EUR500m (partly weak as software mix lower in Q3 than Q2). But the FY25 guide was only changed for FX and a small tariff effect i.e. - as the company said repeatedly - this year''s earnings are heavily skewed towards Q4 25. The Q4 25 weighting appears to be driven by CSPs timing of investment decisions (hypercalers still small). The company said that there''s a long order cycle for MN but shorter for NI and it sounded like Q4 25 rebound is more NI driven. So, there is likely some execution risk around this Q4 25 profitability, reflected in the wide range of the guidance for only 6m. . Bullish on AI opportunity. Nokia continued to emphasise that it saw a large opportunity from shifting more into optical. It is redrawing its account mgmt. organisation and said it can grow its hyperscaler exposure from the current 5% with good traction already post the Infinera deal closing. Most of the AI/cloud opportunity focus has been on optical but Nokia also said there could be some opportunity in routing as well. There was little in terms of specifics but clearly this will feature prominently in the CMD. Arguing there is a large potential opportunity in AI/cloud is hardly controversial, but the key issue clearly remains whether Nokia can actually deliver on this. . Positive read-x from US fibre capex announcements. Nokia said that it was ''really encouraged'' by the recent announcements from US telcos for more investments into fibre. It also said that the BBB having passed into law should help drive more investment in the US. However, it noted this was more a...
Nokia already pre-announced its Q2 25 results, and a guidance cut earlier this week so the main news from today''s full release is where the weakness in the qtr came from (mobile) and some encouraging commentary regarding Q4 25. We see this as slightly reassuring. What happened? Financial highlights Revenues EUR4.55bn (1.8% y/y vs. prior qtr -6% y/y; 3.6% q/q vs prior qtr -26.6% q/q), -5.6% vs cons (EUR4.81bn) GM EUR1.82bn (40.1% GM ie -3.2pp y/y), -13.4% vs cons (EUR2.16bn) EBIT EUR0.08bn (1.8% margin ie -7.7pp y/y), -80.5% vs cons (EUR0.42bn). Operating profit in the quarter was impacted by a non-cash negative impact to venture funds of EUR 50 million which included a EUR 60 million negative currency revaluation. Comparable operating profit was around EUR301m. EPS EUR0.02/sh (-200% y/y),-41.6% vs cons (EUR0.05/sh) FCF EUR88m, -72.5% vs consensus (EUR321m) Net cash EUR2.9bn, vs cons EUR2.6bn Divisional highlights MN revenues EUR1.73bn, -12.1% y/y (9.6% y/y prior qtr), -9.9% vs cons. MN EBIT EUR77m (4.4% margin), 1% vs cons NI revenues EUR1.9bn, 25.1% y/y (3.6% y/y prior qtr), -0.8% vs cons. NI EBIT EUR109m (5.7% margin), -40% vs cons Cloud revenues EUR0.56bn, -9.4% y/y (-13% y/y prior qtr), -1.9% vs cons. Cloud EBIT EUR9m (1.6% margin), 245% vs cons Tech revenues EUR0.36bn, 0.3% y/y (-51.3% y/y prior qtr), -0.1% vs cons. Tech EBIT EUR255m (71.4% margin), -2% vs cons Note we use Bloomberg consensus BNPP Exane View: Nokia already pre-announced its results and guidance earlier this week so the main incremental points are explaining where the rev and operating profit miss came from, plus some of the comments from the CEO commentary From a revenue point of view the main issue appears to have been the MN segment where revenues were 10% below consensus. This fits our view from y''day that this was the main driver behind the disappointing result. At the operating profit level Infinera was a EUR-20m drag on earnings which likely was not captured in results...
What happened? Nokia announced unexpectedly that it was cutting its FY25 operating profit range to EUR1.6-2.1 (was EUR1.9-2.4bn) ie a 14% cut at the mid-point (EUR2.15bn to EUR1.85bn) This was due to weaker USD (now based on USD1.17 vs 1.04 previously; EUR230m impact of) and tariffs (EUR50-80m impact; previously guided Q2 25 impact of EUR20-30m). Consensus is for operating profit of EUR2.1bn ie this implies a mid point 11% below consensus. The FCF conversion guidance for FY25 was unchanged at 50-80% The company also said in Q2 25 it generated revenues of EUR4.55bn (cons EUR4.8bn ie 5% miss) and comparable operating profit of EUR300m (inc EUR50m ventures hit; adjusting for the ventures hit this was still 14% below consensus of EUR407m) BNPP Exane View: The guidance cut is not entirely unexpected - we flagged in our preview the guidance looked at risk (link) and the read-x from Nokia''s closest peer was negative ie there was already some clear risk. That said to pre-announce is unusual in itself for Nokia and reflects the magnitude of the deviation of what it expects vs consensus. The downgrade of operating profit to the mid point of the guidance is mostly in line with the move in the FX rate itself. That said the FX move was known and the issue is that consensus was at the upper end of the range and had not reflected the fx move. The revised guidance implies a figure that is 11% below where Bloomberg consensus currently sits so we would expect the shares to be down by a similar magnitude (ie low DD) tomorrow. The mix of the downgrade in itself is not a major issue in our view - the tariff effects largely roll forward the Q2 25 tariff effects and the fx impact is fairly mechanical. The bigger disappointment arguably is the weakness in the Q2 25. There is no divisional colour at this point (results on Thursday alongside the results call) but the revenues were well below consensus (perhaps the FX sensitivity is worse than appreciated as happened...
What happened? The Finnish press is today highlighting potentially aggressive cost cutting with the centralization of some functions and a big reduction in the workforce to potentially 72-77k employees from the c.78k as at YE24. Nokia shares were down 4% at the time of writing. BNPP Exane View: The sell off in Nokia shares in our view is surprising given the news of restructuring and management change is not an obvious negative. Potentially there might be market concerns that this is a sign of near-term operating weakness necessitating restructuring. However, we believe it is more likely linked to the arrival of a new CEO who will be hosting a CMD in November laying out a new strategy for the group. From the comment so far, we expected this to include a pivot towards more NI / AI related growth and perhaps de-emphasising some mobile activities (where Nokia has suffered a large contract loss in recent years). Broadly these look like sensible moves in our view as NI is more likely to deliver faster growth over the next couple years than MN (where growth could slow as the loss of the major contact kicks in and as the post inventory correction has now largely played out). There might be some incremental costs associated with this both in terms of AI related costs and perhaps restructuring too. But ultimately we believe this would be seen as the correct direction of travel. It is also possible that the share price weakness is linked to the upcoming results and not today''s news. We would note that Nokia''s upcoming Q2 25 results face a tough comp given the presence of a large one-off settlement a year ago and generally tougher comps. On top of this the company also faces tough FX headwinds given the recent weakness in the USD (impact on revs is approx half the FX move). Net-net we believe the key focus areas for the stock are the Q2 25 results themselves (a bit tough given above mentioned issues with little new on strategy) and then the CMD in...
What happened? The Nokia Earnings call just concluded. We highlight the three key points from the call below BNPP Exane View: Overall, we see the call as fairly neutral for the shares as there were no major new disclosures and much of the call was the CEO laying out his early thoughts on the business. . Outlook. The company said the main reason for the more cautious outlook for 2025 operating profit was the EUR120m settlement, i.e. the guidance cut was not directly linked to the Infinera acquisition or the broader macro debate. The company was most bullish on the outlook for Optical, followed by IP with a more moderate outlook for fibre. For MN, the company said it sees a stable outlook in 2025, i.e. similar to what it said last qtr. Nokia said it had not seen any material demand pull in relating to tariffs at this point but was monitoring this area closely. . Tariffs. Nokia said that its Q2 25 guide of a EUR20-30m hit was purely cost focused with no pricing impact embedded. There was no simple answer on how tariffs impact the various contracts as they are different. The guidance does not assume anything specifically tariff related for H2 25 given the uncertainty and fluidity of the situation. Nokia flagged that it had 5 manufacturing facilities in the US, including 2 that came through the Infinera acquisition. . TMUS. The contract is a ''significant multi-year contract'' in RAN but there was no quantification. Nokia did not specify how the phasing or timing of the contract might play out (though we, for example, saw this can be a big driver of earnings at Ericsson). Nokia did not say if the EUR120m settlement was TMUS-related but it said that the settlement was relating to quality issues on a contract dating 2019 (note the TMUS contract was signed in 2018 but started in 2019 - link)
Overall a mixed bag: results were light on a headline basis but underlying appear largely in line. The guidance was updated for Infinera but Nokia said it would not hit the upper end of 25 operating profit guidance which is likely to be seen as disappointing. And Nokia said it signed a new agreement with TMUS (which is a clear positive). On balance we expect the shares to be down slightly. What happened? Group highlights Revenues EUR4.39bn (-5.9% y/y vs prior qtr 5% y/y; -26.6% q/q vs prior qtr 38.3% q/q), 0.6% vs Bloomberg cons (EUR4.36bn) GM EUR1.86bn (42.3% GM ie -6.3pp y/y), -4% vs cons (EUR2.1bn) EBIT EUR0.28bn (6.3% margin ie -6.5pp y/y), -5.3% vs cons (EUR0.29bn). Note this is adding back the EUR120m settlement impact. The release also points to venture fund losses of EUR30m due to negative FX (hedging impact EUR-6m vs EUR15m positive in Q1 24) EPS EUR0.03/sh (-62.5% y/y),1.7% vs cons (EUR0.04/sh) Net cash EUR3bn, vs cons EUR3.1bn Outlook : reiterate operating profit of EUR1.9-2.4bn / 50-80% FCF conversion but hitting top end more challenging. Also guide EUR20-30m impact on Q2 25 from tariffs (no tariff impact reflected in H2 25 guidance at this point). Some minor changes to reflect Infinera acquisition inc tax EUR500m (was EUR450m), capex EUR650m (was EUR550m). Divisional highlights MN revenues EUR1.73bn, 9.6% y/y (-0.8% y/y prior qtr), 4.8% vs cons. MN EBIT EUR-152m (-8.8% margin) vs cons EUR-10m cons which includes the EUR120m settlement NI revenues EUR1.72bn, 3.6% y/y (1.4% y/y prior qtr), 9.2% vs cons. NI EBIT EUR135m (7.8% margin), -16% vs cons Cloud revenues EUR0.57bn, -13% y/y (7.9% y/y prior qtr), -15.6% vs cons. Cloud EBIT EUR14m (2.5% margin), 1574% vs cons Tech revenues EUR0.37bn, -51.3% y/y (84.5% y/y prior qtr), 4.2% vs cons. Tech EBIT EUR259m (70.2% margin), -1% vs cons BNPP Exane View: Overall revenues were in line but operating profit missed consensus. The headline miss is due to a EUR120m settlement but stripping this...
Nokia published its annual report last week and we summarise some of the main points here. Nokia''s quarterly results contain fairly detailed notes to the accounts already so incremental disclosure is limited though there are a few snippets around supplier and customer concentration, asset impairment test assumptions and management pay. What happened? Operational . Outlook for market: Communication service provider (CSP, ie telco operators) market globally fell -5% in 2024, Nokia expects a +2% CAGR 24-29 and aims to grow faster than market. For enterprise market grew 4% in 2024 and Nokia expects an 8% CAGR in 24-29 with a rising market share . Suppliers: Nokia has 9k suppliers with spend spread 28% Europe, 44% Asia, China 16%, Americas 12%. It has its own manufacturing in Finland (10k sq-km) and India (16k sq-km) Financial . Customer concentration: 2023/24 no single customer was 10% of sales but in 2022 biggest customer 11% . FX exposure: USD went from 50% to 55% of revs. INR fell from 5% to zeroVenture fund investments balance sheet value EUR865m (2023 EUR784m) . Divisional assumptions for asset impairment tests: NI and cloud terminal growth 1.5% (was 1.0%). No change to MN. Minor changes to discount rates Mgmt comp . Remuneration of CEO: EUR6.7m in 24 vs EUR8.0m in 23 mostly as share based payment expenses EUR3.1m vs EUR5.0m last year . CEO pay 2024 STI scorecard: 60% operating profit (83% achieved ), 20% cash release (225% achieved), 10% gender diversity (25% achieved ), 10% health and safety (62% achieved). LTI scorecard weightings: rel TSR 50%, 40% cum. Adj EPS, 10% CO2 reduction BNPP Exane View: Nokia already has quite comprehensive disclosure but there are a few interesting points: . Nokia gives a longer term outlook for both the CSP and the enterprise market which points to better revenue growth than what we saw in 2024. This looks reasonable as 2024 started quite weak esp in the US where revenues fell post the post COVID restocking and tax...
What happened? Nokia announced today its President and CEO Pekka Lundmark, has informed the Board that he will step down ''and focus on the next phase of his career''. He will continue as an advisor to the new CEO until the end of the year The BoD has appointed Justin Hotard as the next President and CEO of Nokia. He currently leads the Data Center and AI Group at Intel. Prior to this role, he held several leadership roles at large technology companies, including Hewlett Packard Enterprise and NCR. He will start in his new role on 1 April 2025. BNPP Exane View: There had previously been some press reports (Financial Times, 12 Sept; our write up) that Nokia was considering replacing its CEO so the news that Lundmark is departing is not entirely unexpected. At the time Nokia issued a statement saying ''The board fully supports President and CEO Pekka Lundmark and is not undergoing a process to replace him'' but it appears that a change was made nonetheless. As we said last year we believe that Lundmark has generally done a good job at Nokia in terms restructuring through a difficult few years, pivoting towards areas that can grow over time in NI and cleaning up the portfolio (ex subsea exit). If we compare Nokia''s share price with that of its biggest peer or the wider European market it has outperformed since 2020 (though it has lagged the overall European tech index by around 50pp over that period; chart below). It hasn''t been a perfect period, as Nokia also during this period experience the loss of a major US contract, and MN is a smaller business today where there are still risks around (more broadly the mobile RAN market remains somewhat pressured though this is not down to management). The negative concern from this announcement will be whether there could be similar contract losses to come with press reports of further US contract losses last year (also denied by the company). It is not unusual for the market to see a CEO departure as a sign of...
Nokia Q4 24 results showed continued improvement in underlying trends, even if results were flatted by ~EUR160m of one-offs, rounding out 2024 with EUR700m one-offs altogether. 2025 should be more about improving underlying growth even if one-offs are likely to be smaller. While we see stronger structural growth in semis longer term, Nokia remains our relative pref. in EU Commtech. What did we learn that we did not know previously? 1. Growth in 2025. Nokia no longer guides by segment but expects solid top line growth in both NI and CNS. Nokia guided for flattish top-line in MN despite a ~4pp headwind from ATandT contract loss. 2. Gross margin benefited from large one-offs during 2024 but the underlying performance was around 38-39% and Nokia appears to be set to sustain this. 3. Softer Q1 25. Nokia faces a tough comp in CNS and MN and is coming off a very strong Q4 24 which included some high-margin one-offs, plus Q1 tends to be the least profitable qtr of the year. So growth rates could slow a bit, even if the underlying y/y dynamics are improving. 4. Nokia continues to strike an upbeat tone about its AI/datacentre opportunity with improving traction and some interesting contract wins. While it is debatable if there was any genuinely new data point on this front, the very bullish tone sent the shares sharply higher on the release day. Has our thesis changed? No We have long argued Nokia is a play on fixed vs Ericsson which is a peer on mobile - and we prefer fixed over mobile for network investment. There is upside potential if Nokia breaks into the datacentre router market as a clear challenger, but it is still too early to gauge if this will happen. Changes to estimates - TP raised to EUR4.5/USD4.9 (from EUR3.6/USD3.9) We hike EPS after updating for the strong Q4 24 results but are merely in line with 26 consensus operating profit and below for outer years.
What happened? Nokia''s 4Q24 conference call has just concluded (see Nokia: 4Q24 First Take). As a reminder, Nokia published solid results with a 4% revenue beat and a 20% EBIT beat. However, the guidance for 25 was a touch light vs headline consensus which takes a bit of the shine off. The 25 guidance implies EBIT consensus to move by -8%. Please find below our key takeaways from the conference call: BNPP Exane View: . Outlook. Not explicitly guided by divisional sales anymore. However, management expect strong growth in Nokia''s (NI) Cloud and Network Services (CNS) within both core and also Enterprise campus/edge and stable Mobile Networks (MN) performance despite a 4% headwind from the AandT contract loss. Optical growth is expected to be particularly ''strong'', but clearly lower than the 17% growth seen in Q4. Management was also keen to state the focus is not just about cost reduction, they want to reinvest some of the savings to unlock growth, especially in defence and datacentres/AI. . Mobile Networks. Gross margin was impacted by one-offs in Q4, but underlying performance was around 38-39%. Overall, the revenue guide is towards a flattish trend despite some parts of the business declining. Management is still focused on how they can drive top-line in future, they believe they have a strong technology base into 2025. However, they admit in reality the service provider market is unlikely to be a growth market - there will be some recovery in the market (ex-ATandT they will take their share of the growth). They also reiterate they want to maintain prudence on pricing given Chinese competitors (they pushback that this is detrimental to share). They also take no view on whether regulation eliminates Chinese competition in Europe and Latin America and more broadly in future if their competitors can match them on leading edge silicon (Chinese players do not have EUV). Thus, Nokia is pivoting to a focus on private wireless, private markets, public...
Nokia published solid results with a 4% revenue beat and a 20% EBIT beat. However, the guidance for 25 was a touch light vs headline consensus which takes a bit of the shine off. The 25 guidance implies EBIT consensus to move by -8%. We expect the shares to up slightly as we expect the strong results to slightly outweigh the 25 guidance being below sellside expectations (we believe buyside was lower than sellside for 25). What happened? Group highlights . Revenues EUR5,983m (4.8% y/y), 4.3% vs cons (EUR5,739m) . GM EUR2,761m (46.1% GM), 6.4 vs cons (EUR2,596m) . EBIT EUR1142m (35% y/y), 21.2% vs cons (EUR942m) . EPS EUR0.15/sh (-1600% y/y), 36.9% vs cons (EUR0.11/sh) . FCF EUR51m, -111% vs consensus (EUR-465m) . Net cash/(debt) EUR-4,854m, vs cons EUR-4,633m Divisional highlights . Mobile Networks revenues EUR2.43bn, -0.8% y/y (-19% prev qtr), 3.7% vs cons. EBIT missed by 19%. . Network Infrastructure revenues EUR2.03bn, 1.4% y/y (-15.6% prev qtr), 3% vs cons. EBIT beat by 14%. . Cloud and Network Services revenues EUR1.05bn, 7.9% y/y (-5.4% prev qtr), 2.8% vs cons. EBIT beat by 25% . Technologies revenues EUR0.46bn, 84.5% y/y (36.4% prev qtr), 33% vs cons. EBIT beat by 40%. FY25 Guidance: For FY25 the company guided for comparable operating profit of EUR1.9-2.4bn which is -7.5% below consensus at the midpoint. At FCF they guide for 55-85% conversion of this op profit which implies an FCF of EUR1.4bn, which is -7% below consensus at the midpoint. BNPP Exane View: Overall, Nokia posted strong operating results with three of the four segments beating consensus with NI in particularly strong but also a good performance at CNS and Technologies. There are general signs of stabilisation in some of the more pressured areas and good margin development across most of the group. Even MN is seeing better growth as comps get easier. The key focus is likely to be on the outlook. This is aligned with the long term outlook and the EUR700m one-offs in 2024 means...
We recently relaunched coverage of EMEA semis and have since spoken to nearly 100 investors. Here, we summarise the main investor take-aways and pushbacks. If you would like to discuss in more detail, please contact your BNPPE representative. Sector - what were the main pushbacks? Investors are bullish about AI/HPC (little direct exposure in Europe) but little else. Semicap sentiment is cautious on most of the wider semicap space given China headwinds under Trump 2.0 and concerns on Intel/Samsung, plus the impact of more market concentration in TSMC''s hands and what this means for pricing power. European investors seem a little more willing to dip their toes back into semicap than US investors, perhaps reflecting the fact that semicap still has more growth potential than much of the European stock market. GAA transition was seen as the main positive. Analog buyside sentiment is worse than sentiment on semicap. An already low level of confidence eroded even further post December conferences, with concerns that inventory drag is set to last through Q2 25. There is little buyside willingness to buy beaten-up analog stocks at this point and low confidence mid-25 really is the bottom. The main investor concerns are weak auto/industrial demand and pricing worsening in ''25, plus more long-term risk from Chinese semi competitors. Stocks - positioning and key concerns Buyside sentiment was most bullish around ASMI and BESI, followed by IFX. Investors were most cautious about STM. Views were split on ASML, though on balance we found more bears/skeptics than bulls. After Intel cuts, the biggest investor concerns were on litho intensity and the scope for further capex cuts at Intel post mgmt. change and what this means for ''26 revs/EPS. ASMI was seen as in a sweet spot for GAA but with limited absolute upside to consensus/PE multiple. We found greater interest in relative than absolute value for analog, with IFX generally preferred by investors over STM (and...
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Semiconductors and IT Hardware weekly Our weekly roundup is intended as a one-stop shop, summarising key newsflow, research and datapoints from the past week, as well as looking forward to highlight key upcoming catalysts. Recent Research Highlights NVIDIA(+): Blackwell in full production - Solid results/guide and strong messaging on Blackwell ramp-up, with demand far exceeding supply. Company batted aside the supply chain noise into results and presented a very strong demand picture for Blackwell with supply constrained through CY25. We raised FY25-28 EPS 3-13% and lifted our TP to $170 (33x FY27 PE unchanged). Picture unchanged, NVDA still driving the AI bus. ST Micro (+): Solid analyst day - Cyclical visibility limited but secular growth drivers intact to enable c.10% revenue CAGR and EBIT margin expansion to 24% by 2027-28. Remain O/P. Qualcomm (+): Diversification strategy taking off - QCOM analyst day was focused on the diversification strategy across Auto, PC, XR, Industrial. Key message was AI being infused into edge devices and QCOM has the portfolio for leadership. Half the business to be non-handsets by 2030 and FY29 target model implies c.$14 in EPS (ex Apple). Results and Highlights . PVA TEPLA (=): Waiting for the rebound . Jenoptik(+): Looking through the 2025 glass . Ingram Micro (=): Back To The Future . Coherent (+): Assessing Cost Optimization Plans + Roadshow Feedback . On Semi(-): Treo, targeting new leg of growth Hyperscalers and Other . Alphabet(+): Likely to appeal proposed Chrome break out . Nokia(=): Shares down on suggestion of potential T-Mobile supplier swap Key Newsflow from the Last Week . U.S. export control upgrade not only cuts off TSMC''s 7nm supply to mainland China but also Samsung . China warns Japan over ramping semiconductor sanctions - threatens materials . Japan proposes $1.3bn investment in Rapidus . GlobalFoundries to receive up to USD1.5bn from CHIPS . Nvidia introduces a new merged CPU and GPU AI...
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Nokia has passed the low point and trends are getting better - but it takes time In a glass half full world Nokia is seeing trends inflect. In a glass half empty world it''s still shrinking and the pace is materialising slower than expected, as reflected in a guidance cut for FY24 that still implies an improvement. While Ericsson might have a better near term earnings set-up we continue to favour Nokia on a relative basis given more optionality and cheaper valuation. What did we learn that we did not know pre-Q3 24? 1) Revenue trends remain difficult with a 9% miss vs consensus. In NI optical in particular and ex-US revenues are the main incremental source of disappointment. More broadly Nokia is getting orders in the door but these are taking longer to convert to sales. 2) There appears to be a broader recovery happening in US operator capex, as was also visible in Ericsson''s commentary y''day. Nokia said all NI sub-segments grew 10% in Norther America. 3) Margins were robust but there was some benefit from an unspecified account receivable in ''other operating income'' (in turn nearly EUR100m in the quarter). Stripping this out operating profit would have missed consensus/BNPPE instead of landing in-line. 4) Growing momentum in non-telco CPS. Nokia''s missed the AI hype so far but there are budding signs it might get on the bandwagon. It signed an interesting deal with Coreweave (unlisted) and the Infinera deal should strengthen this further. Has our investment view changed? No We have long been cautious on the mobile RAN market (see Boulevard of Broken Dreams earlier this year) and Nokia faces additional market share pressure (ATandT) on top. However, there is strategic optionality in the asset. NI is turning and CNS might find an AI angle. Nokia could be a surprise winner if there is a Republican victory in November (bonus depreciation). Changes to estimates We make 1-2% cuts to 24-26 operating profit but leave our EUR3.6 TP unchanged.
Underlying trends still under pressure Nokia''s Q2''24 underlying operating profit was well below consensus and FY''24 guidance was downgraded suggesting Nokia is not out of the woods. We cut our TP on the EUR-shares by 5% (ADR -7%) and retain our Neutral rating on the stock, and our generally cautious stance on European CommTech. What did we learn that we did not know pre-Q2''24? 1) ATandT revenues were accelerated by EUR150m, but ATandTs contribution will likely halve in FY25 and then fall further in FY26. More positively there should be a matching NWC inflow - and NWC was generally quite solid in Q2''24. 2) Ambitious H2''24 NI guide. Nokia still expects a very sharp NI rebound in H2''24 and particularly Q4''24. This requires underlying operating profit to go from around EUR400m in Q2/Q3''24 to EUR500m in Q4''24, i.e., a large step-up, which is clearly ambitious. 3) Operating environment is still challenging. The overall tone on MN in our view remains fairly cautious and the German vendor restrictions were ''not needle-moving''. Nokia is more upbeat on the rebound in NI, even if this is taking a little longer to materialise and NI revenues will inorganically be held back by ASN deconsolidation. Has our investment view changed? No We discussed the long term challenges for the RAN market in our report Boulevard of Broken Dreams earlier this year, and we believe this remains an overall headwind. However, we have a relative preference for Nokia over Ericsson given Nokia''s higher exposure to the healthier fixed market over mobile. On a relative basis, we''d note the Nokia/Ericsson spread has widened (23% in -3M) and could tighten given they ultimately face many of the same issues. Changes to estimates We cut FY25E EPS by 6% to reflect cuts to our NI and CNS forecasts. The stock is cheap on ~11x FY25 PE, but with little growth potential, we see only modest upside.
Weaker-than-expected 'underlying' earnings, slower recovery. '24e-'26e comparable EBIT down 6-11%, partly on the divestment. Visibility needs to improve: reiterate HOLD at 6x '24e comp. EBIT.
Weak Q2, but we are expecting a better H2. Minor estimate changes, 2024 will be back-end loaded. We keep HOLD.
Industry still challenged - but passing the low point Nokia''s Q1 24 report saw predictably large revenue declines, down 19% y/y including a ~40% y/y decline in North American and a ~70% y/y decline in India. However, Nokia said this is the absolute low point for revenues, which is a big call. Nokia still has some clear challenges but in our view is relatively better positioned than Ericsson given it is more of a fixed play with clearer value. What did we learn that we did not know pre-Q1 24? 1) According to Nokia, Q1 24 was the low point for absolute revenues. Calling the bottom is a big call, especially as the loss of the ATandT revenues still looms ahead. Whether operators will invest more over time remains to be seen, but at least for now the pressure has eased. 2) More upbeat on most of the outlook for NI. Some peers had already warned, and Nokia echoed concerns on the pace of turnaround of the optical networks business. But the overall commentary on a return to growth including for enterprise and webscale was encouraging. Nokia flagged the expectation for a particularly strong Q4 24 later this year. 3) MN gross margin should normalise from Q2 24. More positively, there are largely cost savings including on the back of the 2k FTE reductions. Has our investment view changed? No We discussed the long term challenges for the RAN market in our report Boulevard of Broken Dreams earlier this year, and we believe this remains an overall headwind (we would note that renewed tax relief in the US on investment in network equipment remains some way off). However, our relative preference for Nokia over Ericsson remains given Nokia''s higher exposure to the healthier fixed market over mobile. Changes to estimates We raise 24E operating profit, with most of the upgrade driven by increases to our NI forecasts. The stock is cheap on 10x FY25 PE, but with little growth we see only modest upside.
Weak quarter for Networks' BUs behind Q1 adj. EBIT -7% vs. cons. We cut '24e-'26e adj. EBIT 4-1%, mainly from MN. 2024 will be back-end loaded - we keep HOLD.
Nokia Oyj Nokian Renkaat Oyj
Weak Q1e for Networks' BUs, but adj. EBIT +53% y-o-y due to Technologies. We lift '24e adj. EBIT 3% on the renewed smartphone agreements. 2024 will be back-end loaded - we keep HOLD.
Network Infrastructure biggest earnings driver Up till the Q4 results, the main investor focus on Nokia was the challenged outlook for the Mobile Networks business, which if anything was weaker than we expected (25/26 MN EBIT cut 40-60%). But Q4 24 results showed the importance of the NI segment with Nokia is calling the bottom there, with a recovery to come in H2 24. We have a relative preference for Nokia (=) over Ericsson (-). What do we know that we didn''t know on Tuesday? 1) Rebound to come in NI. NI revenues fell 26% y/y in Q4 23 but the surprise was Nokia guided for a strong H2 24 with a solid order book and green shoots. We expect NI''s operating profit contribution to be ~4x bigger than MN''s, ie wireline equipment is now by far the most important segment for the group. 2) MN headwinds remain. Nokia expects to lose ~EUR1bn mobile equipment revenues in India in 2024 and we estimate the ATandT contract loss will be another ~EUR0.4-0.5bn. This comes on top of a depressed market 5G RAN. By 2025 we expect EUR7bn MN revenues. 3) Better FCF. Nokia guided for an operating NWC (pre Technologies) improvement as well as EUR0.5bn cash tax pa (was EUR0.7bn). Has the investment thesis changed? No In our report Boulevard of broken dreams we argued that the overall equipment market was likely to be subdued for several years but that the outlook for wireline equipment was better than for mobile. This was clearly visible in Nokia''s downbeat assessment of the mobile RAN market but it''s far more upbeat assessment of the wireline market where all its segments were seeing a better outlook. Changes to estimates and valuation We lower 2025 operating profit 13% to reflect much lower Networks revenues, but our OpCF increases 17% as we reduce our tax and NWC drag. As a result, we raise our DCF-derived TP to EUR3.7 from EUR3.4. The 2025 PE is a pedestrian 10x but on an EV/EBIT basis it trades at a more attractive 6x vs US commtech peers closer to 10x.
Nokia Oyj Nokia Oyj Sponsored ADR
14% comparable EBIT beat, but 7% sales miss. '24e-'25e comparable EBIT cut 2-1% on slightly lower sales. 2024 will be back-heavy - we reiterate HOLD.
We see a weak Q4e, comparable EBIT -34% y-o-y. Negative estimate revisions, mainly stemming from MN. Solid valuation support, but HOLD on neg. momentum.
Nokia published its Q3 results which missed the consensus estimates by 12% and 10% for sales and Ni, respectively. However, it has re-iterated its FY23 guidance (supported largely by network services) and has also re-iterated its 2024-26 target of >14% comparable operating profit but with the help of a newly-announced cost-cutting programme.
End markets continue to slow; how seasonally strong could Q4 be? Going into Q3, we were cautious on earnings (link) being ~6%/~15% below consensus adj. EBIT for Q3/Q4. Nokia reported an overall earnings miss, missing consensus revenue expectations by ~13% and adj. EBITA by ~34% (excluding Technologies). Mobile Networks revenues missed consensus by -17% and adj. EBIT margins by -210bps as North America inventory de-stocking and weak demand cycle continues. Network Infrastructure revenues missed consensus by -9% and adj. EBIT margins by -230bps as growth declines accelerated across IP, Optical, Fixed and Submarine. Looking towards Q4, the company expects a normal revenue seasonal improvement with the typical range being 20-25%. Given India took a big step down in Q3 and North America continuing being weak, for Q4 revenues we take the lower-end of the seasonality range at +20% QoQ for both Mobile Networks and Network Infrastructure. Ericsson had commented that Mobile Networks Q4 seasonality should be ''somewhat less than normal (+22%)'' but also recall Ericsson has yet to see a significant QoQ step-down in India as Nokia did. Inventory digestion is expected to continue into 2024. 2024 growth debate, restructuring back-end loaded. FY guide clock ticking on Oppo and Vivo. Looking ahead to 2024, growth and profitability debate emerges. For Mobile Networks, Dell''Oro is still forecasting +14% y/y rebound in U.S. RAN (link). With most downcycles lasting 2 years or more and India growth tapering off, we factor in flat Mobile Networks CCY growth in 2024. For Network Infrastructure, we assume a LSD ~2% growth rate as government stimulus should help with a shorter cycle versus Mobile Networks. Restructuring should also help margins, but likely to be 2H-loaded. Hitting FY guide is also dependent on signing Oppo and Vivo in Q4 within the next 2 months. Uncertain Q4 set-up but could Investor Day be a catalyst? Lower earnings and TP. For the upcoming Investor Day, we...
Q3 comparable EBIT -23% vs. cons. Cost savings to support margins in '24e. We cut '23e-'25e comp. EBIT by 6-1% - keep HOLD.
Mobile and Network Infrastructure continues to slow. FX headwinds to accelerate. Nokia reports Q3 results on Thursday 19 October. Following Ericsson''s ''warning'' on 11 October (link) and Dell''Oro RAN market downgrade (link) and Spirent warning (link), we remain cautious on end markets. Going into Q3, for Mobile Networks we assume QoQ revenue declines of -2.5% which is in-line to Ericsson''s Q3 revenue QoQ revenue decline. We also have Mobile Networks gross margins staying in the ~33% range (while consensus expects a +40bps QoQ improvement) with adj. EBIT margins stepping down to ~7%. For Network Infrastructure, we expect Q3 revenue declines of -7% CCY. We also expect margins to continue stepping down given slowing growth with gross margins of 36% and adj. EBIT margins of ~11.5%. Excluding Technologies, we are ~2% below consensus on revenues and ~6% below on adj EBIT for Q3. FX headwinds are also expected to accelerate to -5% in Q3. Consensus embedding a Technologies step-up in Q3 We are wary of consensus expectations for Technologies revenues/adj. EBIT to step up from ~EUR250m/~EUR155m in Q2 (excluding EUR80m catch-up payments) to ~EUR270m/~EUR180m in Q3 given the absence of Oppo and Vivo resolution. We continue to model Technologies Q3 revenues/adj. EBIT of EUR250m/EUR155m which is in-line with Q2 levels. Similar dynamics to Ericsson; -15% below consensus Q4 ad. EBIT (excluding Technologies) Similar to Ericsson, consensus is embedding a Q4 rebound in Mobile Networks and Network Infrastructure. Consensus has Q4 Mobile Networks/Network Infrastructure adj. EBIT margins bouncing back up to ~9.5%/~13.5% which looks too optimistic to us. Excluding Technologies, we are ~15% below consensus Q4 adj. EBIT. Despite weak near-term dynamics, we continue to prefer Nokia (+) over Ericsson (=). Despite slowing market growth, we continue to prefer Nokia (+) over Ericsson (=) given its diversification, capital allocation and long-term margin optionality. We continue...
Regained 5G competitiveness and strong NI performance in '21-'22, but recent market headwinds to persist in H2'23e. Change of analyst -– we downgrade Nokia to HOLD, TP EUR 3.9.
Slowing growth but margins protected Nokia missed on overall revenues by ~6% excluding the EUR80m catch-up payment in Technologies driven by both Mobile Networks and a larger extent Network Infrastructure. However, underlying margins were 60bps above consensus. At Mobile Networks, despite gross margins coming in below consensus, operating margins came in +180bps above consensus as we think the company benefitted from large volumes in India (which are gross margin dilutive but offset by economies of scale on the EBIT line) as well as cost control. At Network Infrastructure, growth is visibly slowing with Q2 revenues declining y/y for the first time at least since 2021. Despite the rapid growth slowdown, Network Infrastructure operating margins still came in above 13% which is around the average of 4Q22 and 1Q23 levels (~15.5%) and longer term running average between 3Q20-3Q21 levels (~10.5%). Tricky market in 2H with small recovery towards Q4 Looking forward to 2H, the company has guided for similar levels of revenues for both Mobile Networks and Network Infrastructure. For Mobile Networks, we have Q3 gross margins at similar levels ~33.5% with adj. EBIT margins stepping down ~50bps to ~7.5% and only improving back to ~35% gross margins and ~8% adj. EBIT margins in Q4. For Network Infrastructure in 2H, we have revenues similar to 1H and operating margins of just under 13%. Technologies despite renewing with catch-up payments the underlying run-rate remains ~EUR1bn though with Apple license starting in 2024 the run-rate would be increased to ~EUR1.1bn. Arguably a small uplift was already expected given annualized handset volumes and technology progression since the previous deal was signed in 2017. Remain Outperform on cost control, diversification and capital returns We continue to prefer Nokia over Ericsson given evidence of margin management, overall diversification and ongoing capital returns. We primarily reduce our revenues by ~6% but...
Market outlook worsening for both MN and NI. FY'24e-'25e operating profit lowered by 4-5%. Investors unlikely to return in next 3-6 months, but we keep BUY.
Q2 results 20 July: FY'23 outlook lowered on delayed recovery. FY'23-'25 sales and operating profit reduced by 5-6%. Delayed market recovery remains a deterrent; TP EUR 5.5 (6.0).
Near-term Mobile Networks weakness persist with limited visibility Current margin weakness is primarily driven by geographical mix shift with US operators de-stocking their inventory, and this is expected to persist into Q2 and possibly into Q3. Management still expects 2H to be overall stronger than 1H though has cautioned that operators themselves have limited visibility. Operators'' conversations on cashflow optimization continue. For Q2, similar trends to Q1 are expected. Despite near-term weakness, management remains confident on longer term trends in data consumption and low 5G Mid-band penetration (~20% outside of China and ~50% in the US). Network Infrastructure growth to moderate after 2 strong years Network Infrastructure growth is expected to moderate for the remainder of the year following two strong years. Despite hitting operating margins of 15.3% in Q1, management has kept the 11-14% operating margin range guidance in anticipation of slower growth ahead as well as the benefit from pent up sales that came through in Q1. Longer term structural growth trends in Fixed Networks from fiber penetration and buildouts, IP and Optical Networks from data center and connectivity investments, and long-haul data transportation in Submarine Networks remain intact. Long term margin opportunity present, both in Mobile and Network Infrastructure For Mobile Networks, management sees opportunity to increase operating margins over time considering the gap versus Ericsson (which they believe is not due to technology or share). On Network Infrastructure, management remains committed to raising margins at Optical Networks from low-single digit to double digit and Submarine Networks from low-single digit to high-single digit. Remain Outperform on Nokia given valuation and long term structural trends CEO Pekka Lundmark has highlighted that Network Infrastructure EBIT has grown from ~EUR450m in FY20 to EUR1.1bn in FY22 driving ~50% expansion group EBIT expansion...
Nokia published Q1 profits that were weaker than the market had expected due to the geographical mix. Like Ericsson, Nokia saw an accelerated roll-out of 5G in India (15% of sales in Q1 vs 5% in FY22) which is usually less profitable and cash intensive initially. Net sales were up by 10% to €5.9bn, beating the market estimate of €5.7bn. However, the comparable net profit stood at 342m (-18% yoy and -11% vs market consensus).
Nokia''s diversification supporting earnings again Nokia''s 1Q beat top-line by +2% but missed on EBIT by -14% primarily due to Technologies. Excluding Technologies and one-offs, Nokia beat consensus adj. EBIT expectations by ~8%. Mobile Networks gross margins were weaker than expected given ongoing mix shifts and inventory de-stocking in the North America RAN market. However, Nokia''s diversification helped from continued strength in Network Infrastructure, where the segment delivered beats on topline and margins. Looking ahead, Network Infrastructure growth is expected to slow but we think the fading growth trajectory is already factored into market expectations (FY23 consensus +3% y/y). Is Q2 the bottom for Mobile RAN pressures? Looking ahead to Q2, management expects similar trends for Mobile Networks as margin pressures from mix shifts and de-stocking continue. We have modelled Q2 Mobile Networks gross margins and EBIT margins to step down -50bps QoQ. In comparison, Ericsson has guided for gross margins sequential step-down of ~2.5% but we highlight Nokia has relatively lower North America exposure and has benefitted from volume scale and OPEX discipline this quarter which could continue into Q2. Despite the weak 1H, management has left the FY23 EBIT margin target of 7-10% unchanged. Technologies - Plugging the hole The current run-rate for Technologies is only ~EUR1bn and we estimate with Oppo and Vivo signed that should bring the run-rate back up to only ~EUR1.2bn. Management expects to return to the EUR1.4-1.5bn run-rate post smartphone renewal cycle combined with new growth areas, and is confident on internal renewal assumptions. We are more cautious on Technologies renewals, assuming a step back up to EUR1.4bn only in 2025. Nokia''s diversification continues to help, though Technologies now an uncertainty Despite ongoing Technologies uncertainty, we remain Outperform on Nokia due to its diversification. We lower our margins by...
Nokia''s helpful diversification. Q1 results to be announced on Thursday pre market. We recently downgraded Ericsson to Neutral, preferring Nokia as an Outperform (click here for the note: Choppy year ahead; Prefer Nokia''s diversification) due to its more diversified portfolio including Network Infrastructure which has been benefitting from healthier demand trends. At 4Q22 earnings, management commented on stronger order books entering 2023 versus last year. Peer Cisco also upgraded their FY revenue guidance which also bodes well for Nokia''s IP Routing demand. Long-term margin optionality within On margins, Nokia''s Mobile Network margins remain well below Ericsson''s ex-IPR at ~17%, which we think Nokia could raise over time. We believe the margin gap is in part due to lower geographic exposure within the U.S. which is one of the more profitable markets. On Network Infrastructure, management also indicated margin upside targets for Optical (low-single-digit to double-digit), and Submarine (low-single-digit to high-single-digit). How bad could Mobile Networks get? Recent Airbrok Radio launches to help wage inflation Ericsson''s Q1 gross margin guidance of 40-42% (including IPR) indicates a tough H1 ahead for Nokia''s Mobile Networks. We assume operating margins fall to 7% in 1H before recovering to ~9% in 2H. We think the recent Airbrok Radio launches would also drive higher pricing to combat recent wage increases and help support the operating margin. Diversification with potential catalysts; Remain Outperform (lower EPS on higher taxes) Nokia recently lowered its gross cash balance requirements from 30% of sales to 10-15%, which could signal higher capital returns (dividends and buybacks) ahead. Oppo and Vivo successful negotiation is also another positive earnings catalyst. Ongoing share repurchases should also contribute to earnings accretion. Our revenues are slightly lowered by 0-1% driven by FX and our Net Profit decreases by -12-13% driven...
New Brand, 6 Key Pillars and 4 enablers underpinning Networks strategy We attended (virtually) Nokia''s business update presentation at MWC 2023 on Sunday. The six key pillars underpinning Nokia''s Networks strategy are 1) Grow CSP business faster than market, 2) Expand the share of enterprise, 3) Actively manage the portfolio, 4) Secure business longevity in Nokia Technologies, 5) Build new business models, and 6) Develop ESG into a competitive advantage. The four enablers are 1) Talent, 2) Long-term research, 3) Digitalization, and 4) Brand. Nokia has also unveiled a new company logo and branding, meant to change the perception into Nokia being a Technology B2B company instead of a consumer brand. New product launches; AirScale Habrok radios and anyRAN Cloud software Nokia has also announced new product launches including the AirScale Habrok radios as well as the anyRAN Cloud software. The new AirScale Massive MIMO HABROK radios offer 30% lower power consumption while being 30% lighter, and are commercially available starting late 2023. The anyRAN Cloud software provides flexibility across customer (CSP or enterprise), architecture (cloud, hybrid, purpose-built), infrastructure (workload synergies), and hardware (datacenter flexibility). Future of Networks in Industrial and Enterprise Metaverses; Organic Investment over MandA Nokia sees the future of Networks in the Industrial and Enterprise Metaverses, with combined opportunity of USD8-13bn by 2030. Internal studies also show metaverse data to dominate network traffic by 2027. In terms of achieving these intelligent Network capabilities, management continues to prefer organic RandD and investment over bolt-on MandAs which may lead to more flexible capital returns in terms of dividends and buybacks. Continue to see Nokia as the more diversified play; Remain Outperform We continue to see Nokia as the more diversified play entering into a slowdown of the RAN market (click here: Choppy year ahead;...
Nokia''s diversification helps to weather the uncertainty Going into Q1 we recently downgraded Ericsson to Neutral, preferring Nokia as an Outperform (click here for the note: Choppy year ahead; Prefer Nokia''s diversification) due to its diversification into Network Infrastructure, capital returns, IPR catalyst and long-term margin optionality. Last week''s results demonstrated just that. Nokia delivered an overall ex-Licensing ~+2% beat to adj. EBIT as strength in Networks Infrastructure more than offset weakness in Mobile Networks. Looking ahead to H1, Mobile Networks continue to face margin pressures as North America growth fades while India 5G rollouts ramp, and we have 1H23 gross margins falling -2.5% y/y (this compares to Ericsson ex-IPR Networks gross margins falling ~5% y/y in 1H23. We note that Nokia has a relatively smaller footprint than Ericsson (~40% less footprint), and having ''lost'' Verizon in 2021 may be a silver lining after all (given Verizon''s indicated lower CAPEX spending in FY23). Network Infrastructure continues to outperform as supply chain eases at Optical Networks, FP5 orders ramp at IP Networks, and Submarine Networks continue to be driven by Webscaler network buildouts. Management also commented order book looks good entering into 2023. We continue to believe Nokia''s diversification would help offset Mobile Networks choppiness. 2023 guidance looks conservative with LT margin optionality Nokia has guided for 2023 operating margins of 11.5-14%. We estimate excluding Oppo and Vivo catch-up payments the range would have been ~80bps lower indicating a step-down from 2022 levels which appears conservative. Management detailed LT margin targets at Network Infrastructure (IP and Fixed sustaining at mid to high-teens, Optical improving from LSD to double-digits, Submarine from LSD to HSD). LT margin optionality remains at Mobile Networks vs Ericsson. Remain Outperform on Nokia given its diversification and capital returns We...
Nokia CFO confident in performance, from ''end to end'' We hosted Nokia''s CFO for in person investor meetings in Europe. The company delivered a reassuring message with supply chain constraints easing, allowing for catch up revenues to come through. In Mobile Networks, India''s 5G roll out (and share gains vs Samsung) should drive growth in 2023, along with ongoing share gains from Huawei in Europe, and continued solid demand in North America. Fiber roll outs continue to drive demand for Nokia''s industry leading Fixed Network offerings (42% share globally), while semiconductor innovation is helping in both IP Networks (leading to hyperscaler customers) and Optical (leading to metro success). Long backlogs should keep Submarine Networks busy for the next 3-5 years, while Technologies should benefit from handset renewals over the coming years. Nokia has moved away from selling ''end to end'' offerings through discounting, and is now looking to us tech competitiveness to drive share gains in each of its Networks businesses, with government stimulus and geopolitics now tailwinds. In this report, we provide roadshow feedback, a detailed analysis of potential share gains from Huawei over time, an overview of the India opportunity, and an update on Nokia''s new ESG strategy. On track for growth and margin expansion in 2023 Nokia is committed to delivering comparable operating margin of 11-13.5% this year (up from an underlying 11% in 2021, and vs 11.9% consensus), despite input cost inflation. The low end of guidance is also possible even if two key IP licensing renewals slip to 2023 (all else equal). Nokia believes it can outgrow its market in 2023 and track toward its longer term margin targets, which we see as translating to revenue growth, share gains and margin expansion in 2023 (consensus expects just 4% rev growth, despite FX tailwinds, and 12.6% comparable margins). Reiterate Outperform rating and EUR5.8 target price Despite a net cash position,...
Nokia showed that it benefits from resilient growth despite the uncertain macro environment, with a strong performance from its core activity. However, its margins were poor due to a sharp decrease in Nokia Technologies revenues, which is the most profitable business. In addition, it is struggling to pass on price increases to customers and is absorbing the impact of inflation. All in all, a worrying set of results.
Strong Mobile Networks momentum but some near-term some margin headwinds Nokia showed strong Mobile Networks momentum with ccy growth of +12% y/y, beating consensus expectations by +8% with strength driven primarily by North America. Mobile Networks Margins were also ~90bps ahead, driving the segment EBIT beat of +20%. Demand environment remains favourable amidst macro uncertainty, with the company still expecting Mobile Networks market growth with further market share gains in 2023. Near-term demand is also supported by upcoming India 5G roll-outs which is expected to ramp aggressively in a short space of time. Management has cautioned near-term gross margins impact from mix shift away from North America and also the initial roll-out phase in India. However, longer term the scale benefits from capturing the Indian market should offset the margin dilution post the initial roll-out phase. There was also some catch-up sales in Q3 with easing supply chain which should also continue into Q4 and into 1H23. Strong execution and pricing power amidst supply chain and inflation Nokia has maintained its strong execution in Q3, and continues to see an easing situation in supply chain which is expected to be mostly resolved by 1H23. The company has also won a reference Hyperscaler customer in IP routing which should support revenues as deployment ramps. Despite the inflationary environment, Nokia has demonstrated pricing power with operating margins continuing to perform well. Remain Outperform on strong execution and discounted valuation Despite the external challenges and Technologies negotiation and litigation, Nokia has been executing well on supply chain components sourcing and inflationary pricing. We make small changes to revenues and operating margins, valuing Nokia at FY24e ~7.5x adj. EV/EBIT (down from ~8x) discounted back. We lower our TP from EUR5.9 to EUR5.8 (ADR price lowered to USD5.7). We remain Outperform on Nokia from strong execution and...
Strong FX tailwind and easing supply chain should continue to support top-line Revenue growth into 2H should be supported by continued strong FX tailwinds of ~6% across Mobile Networks, Network Infrastructure and Cloud and Network Services segments. Underlying growth of Mobile Networks should also improve with Network Infrastructure growth maintaining at high-single digits as supply chain tightness starts to ease into 2H. This ties in with company comments in Q2 and recently from peer Cisco who saw easing of supply chain shortages. A weakening demand environment could also see supply catching up with demand, acting as a hedge. Inflationary pressures persist, higher cloud investments ahead to compete with Ericsson? Our recent catch-up with Ericsson also reminded us that inflationary pressures continue to persist and the company expects a similar situation as in Q2. However, despite these inflationary pressures Nokia has executed well in Q2, beating margin expectations by 80bps and we expect continued easing supply chain tightness to help. Continued self-help initiatives by the company should also help expand margins. However, Cloud and Network Services saw a loss in Q2 and we think Ericsson''s acquisition of Vonage may see Nokia step up investments in this area to remain competitive. Nokia continues to lead Europe''s 6G initiatives as leader of the Hexa-X-II project. Remain Outperform on valuation and cashflows Nokia continues to trade at a discounted valuation of FY23e 6.7x EV/EBIT (non-IFRS) and FY23 ~8% FCF Yield, in our opinion. In a weakening macroeconomic environment, we think 5G spend could also be relatively defensive given its strategic nature. Overall cashflow profile of Nokia has also improved. We remain Outperform on Nokia, increasing revenue estimates by 2-3% driven by stronger FX but reducing operating margins by 40-60bps due to higher investments into Cloud and Network Services. We continue to value Nokia at FY24e ~8x EV/EBIT with an...
Following the poor results of Ericsson last week, the market had sanctioned Nokia in anticipation. However, the sound results in its two largest business units have proven to be resilient, and the strong dollar impact combined with the improvement in operational efficiency has offset the rise in costs. The business remains supply constrained, but the supply chain is expected to ease in the next half year, which should unlock higher growth in sales for Nokia.
Q2 earnings beat with strong FX tailwind Nokia delivered another earnings beat, with revenues coming 5% ahead and operating margins 80bps ahead of consensus expectations. FX was an 8% tailwind in the quarter. The topline and operating margin beats were driven by Mobile Networks and Network Infrastructure. Mobile Networks managed to grow 1% cc as strong 5G deployments in North America were offset by weakness in Europe. Growth at Fixed Networks and Submarine Networks remained strong at Network Infrastructure driven by continued Operators'' fiber investments in North America and hyperscaler connectivity buildouts. Cloud and Network Services margins were below due to SGandA investments into emerging SaaS growth areas including Enterprise and Cloud and Cognitive segments. Oppo and Vivo licensing deals were still being negotiated, with management still confident of successful outcomes by year end. Supply Chain fears lessening; FY22 guide largely unchanged Management is seeing improvements in supply chain in 2H22 and 1H23 as they are starting to see more components becoming available, which is a positive development since Q1. Falling chip memory prices could also indicate further easing of supply versus demand. Company has also mostly moved past China lockdown impacts. Despite worsening macro indicators, management has yet to see any significant impact on sales or order books through the quarter as customers continue to invest. FY22 revenue (in ccy terms) guide was left unchanged due to uncertainty around inflation and macroeconomic environment. On margins, company is trending towards middle of 11-13.5% target range despite strong 1H as management sees favourable Mobile Networks mix easing, salary increases and inflation in 2H. Remain Outperform. Increase TP slightly to EUR5.9 We remain Outperform on Nokia, increasing our revenue estimates by 1-2% and operating margin by 0-60bps. We increase our TP slightly to EUR5.9 (ADR price to USD6.0) and continue to...
Margin impacts from inflation and supply chain Nokia will report FQ2 revenues on Thursday before the open. Ericsson has already reported and delivered a small +2% revenue beat but operating margins came 140bps below consensus estimates due to higher investments into supply chain and inflationary impacts. We think this could signal risk of margin impacts for Nokia especially in the Mobile Networks division, given Ericsson has managed its supply chain relatively well in our opinion. From a revenue standpoint, Nokia may also see higher supply chain impact relative to Ericsson (who has been relatively unaffected) due to higher China channel exposure on the Electronic Manufacturing Service (EMS) side, with just under 30% of manufacturing still in China. As a result, we are slightly above consensus on overall reported revenues, but 70bps below consensus on operating margins, driven by Mobile Networks. FX to cushion any revenue impact from supply tightness We expect Nokia to benefit from a ~5% FX tailwind in 2Q22 due to the strengthening of the USD, while Technologies will remain weak until two expired contracts are renewed. We have lowered our estimates due to slightly more margin caution considering the inflationary pressures, but we remain within the company''s FY guidance range. The company has a wide 250bps margin range on its FY guidance (11-13.5%) and we believe a raising of the lower end of the range is possible. Consensus is at 12.4%. An FX driven FY revenue guidance raise is likely as well, from the current EUR22.9-24.1bn level. Remain Outperform on cashflow and valuation. Lower PT from EUR6.2 to 5.8 Despite these near-term headwinds manufacturing and inflationary pressures, we remain Outperform on Nokia due to its resilient cashflow generation and discounted valuation. Even when modelling a continued inventory build-up scenario, Nokia is expected to generate between EUR1.5bn to EUR 2.6bn in FCF between FY22 and FY24, exceeding 75% Adj....
We met with CEO Pekka Lundmark in London yesterday We met with Nokia''s CEO yesterday and came back with an overall positive impression. Since joining the company in August 2020, Nokia CEO has implemented significant reorganisation and regrouping, including making division leaders more responsible for managing costs, which has improved margins, despite multiple new headwinds. Mr Lundmark feels operationally the company has progressed beyond initial expectations, and that sales and margins would have been better if not for component inflation and supply chain bottlenecks. In terms of pricing, higher prices are being pushed through on newer deals which is not impacting demand, although price lifts to existing contracts is more challenging, most likely impacting Mobile Networks the most. Enterprise the solution to structurally low growth operator exposure? The enterprise segment is currently 7% of sales and remains a key growth priority. To reach the millions of industrial campuses worldwide, Nokia continues to build its network of distribution partners. Enterprise deal sizes are much smaller than at CSPs but project delivery is relatively less complex due to more product standardization. Nokia''s growing share of enterprise mix would also be a tailwind to margins in the long run. During recession periods, Nokia believes we could see a scenario where enterprises spend on digitalization as a way to improve efficiencies and cut costs. Capturing value across the chain through semiconductors and software In order to capture more value that it has historically, Nokia is increasingly designing a larger portion of its semiconductors. RAN virtualization remains a theme as more of the industry moves toward virtualized architectures. But performance and power efficiency are not guaranteed and a hybrid state will likely continue to be the dominant way CSPs build their networks, according to Nokia. Virtualization is an evolution, not a revolution. In terms...
The list of the headwinds impacting Nokia’s first quarter is long and it might have seemed reasonable to assume that the financial figures would be soft. However, Nokia delivered a strong beat in all financial metrics for its first quarter report, and we believe it is well set to reach the high-end of its FY22 guidance.
Strong earnings beat despite Technologies licensing miss Nokia delivered a +2% revenue beat and +12% EBIT beat despite the expiry of two Technologies license deals. EBIT beat would have been 20% if not for the Technologies licensing miss. According to management, the licensing deals are more of a timing issue, and current guidance assumes negotiation conclusion by end 2022. The revenue beat was driven by Network Infrastructure, particularly Fixed Networks and Submarine Networks. Mobile Networks saw very strong margin expansion, driven by continued improved product portfolio as well as an ongoing strategic transition to higher value-added services. Cloud and Network Services delivered better than expected margins also driven by a better product portfolio, though management has cautioned the continued need to invest and as such the FY22 margin guide remains 4-7%. Healthy demand despite near-term supply chain and inflation headwinds Underlying 5G demand remains robust even though Nokia continues to be impacted by supply chain tightness particularly in various supplier specific challenges. The lockdown situation in China has added to further contract manufacturing difficulty. Despite these challenges, Mobile Networks is still expected to grow in 2022. To combat inflation, the company is putting through higher pricing through on new deals. Network Infrastructure pricing power should remain strong given FP5 and 25G PON product launches, with recent datacenter switching deal with Microsoft demonstrating Nokia''s product competitiveness. Remain Outperform on Nokia despite near-term supply chain headwinds The earnings beat demonstrates Nokia''s improved product portfolio, profitability and restructuring progress. Despite near-term headwinds from inflation and supply chain, we remain Outperform on Nokia given its robust FCF generation and healthy 5G demand. We continue to value Nokia on FY24e ~9x EV/EBIT at EUR6.2 (Our ADR PT is lowered to USD6.5 due...
Nokia has published decent results, broadly in line with consensus after it published last month a preliminary statement to warn the market its margins would be above guidance for both FY21 and FY22. The positive news comes from the announcement of a share buy-back programme of €600m.
New capital returns the positive event, but higher NWC ahead Nokia delivered an in-line set of earnings given the pre-announcement. Weaker Mobile Networks revenues due to the Verizon impact was offset by stronger Network Infrastructure revenues from strong CSP spending in Fixed Wireless Access and Fiber. Mobile Networks operating margins continue to outperform expectations. FY23 margin guidance was abandoned in favour of greater or equal to 14% margins in the long-term which we think is conservative given FY22 margin guidance of 11-13.5%. FY22 FCF guidance was issued at 25-55% adj. EBIT conversion, which is a step-down from FY21 levels of 87% due to higher NWC (higher inventory, receivables), despite repeated comments from the company that there were no one offs driving the 2021 FCF performance. FCF conversion is expected to increase back to 55-85% levels in the long-term. Despite the step-down in FCF, Nokia is still expected to generate over EUR 1bn+ in FCF in FY22. Dividends (EUR 0.08) were reinstated alongside an initiation of a EUR600m buyback (over two years) which we think are positive signals of management''s confidence in the strength and longevity of the company''s FCF generation. Supply Chain remains tight, but has stabilized Management commented that the supply chain situation while managed well currently, still remains tight which is driving some cautiousness in the earnings guidance. On the plus side, management has observed that the supply chain situation has stabilized. Inflation will also be mitigated through higher prices negotiated with clients. Remain Outperform. Lower target price from EUR7 to 6.2 on weaker cash flow outlook Give the weaker FCF outlook, and the weak growth near term and limited margin upside longer term (3-5 years), we lower our target price. We move from using FCF yield to using 9x EV/EBIT, in the middle of the 6-12x historic range, and a discount to the 10x we use for Ericsson, which has higher growth,...
This is a special report on Nokia Corporation – the Finnish telecom giant with one of the most radical business transformations ever seen. The company was once a global leader in a rapidly evolving mobile phone market where its market share was destroyed. After some heavy management changes, Pekka Lundmark took over the reins of Nokia and it has now evolved to become a trusted hardware partner for telecom networks with a strong commitment to innovation and technology leadership across mobile, fixed, and cloud networks. The company is investing in building intellectual property and long-term research, led by Nokia Bell Labs. Its financial performance has improved recently after the company increased its pace in signing major 5G contracts, which have been paying off handsomely. The company was previously far behind its competitors in the 5G race, particularly rival Ericsson, but it is now a front-runner especially after benefiting from Ericcson's misfortune in China when Beijing retaliated against Sweden's ban on Huawei. Nokia's mobile networks, cloud, and network services segments also have a positive outlook and the company has delivered decent results despite its supply chain issues. We give the company a ‘Hold’ rating. Baptista Research looks to evaluate the different factors that could influence the company's price in the near future and attempts to carry out an independent valuation of the company using a Discounted Cash Flow (DCF) methodology. In this report, we have carried out reasonable forecasts of the annualized income statement and cash flows and carried out a DCF valuation of the company using its Weighted Average Cost of Capital (WACC) to determine a forecasted share price.
US Infrastructure Deal, another driver of sustained high demand for Nokia Of the USD1.2TN infrastructure bill passed on Friday in the US, USD65bn will go to accelerating broadband investments, and we see Nokia as a key beneficiary, along with fiber and optical providers Ciena (NR) and Adtran (NR). Nokia''s Fixed Networks business shining as fiber booms in a post COVID distributed world Fixed Networks was a drag as legacy copper was in decline, but fiber and Fixed Wireless are now 90%+ of the Fixed Networks business. The business grew 29% in Q3 and is 11% of revenues at Nokia, with Moblie Networks still 43%. Nokia believes its 25G PON (Passive Optical Network) technology is 18 months ahead of competition, while being #1 in key fixed network technologies GPON and XGS(10G)-PON (40% share ex China), based on proprietary Nokia silicon. Significant opportunities for fiber coverage remain, especially in Europe (see p3). The EUR1.8TN European Recovery Plan, should allocate ~EUR140bn to ''Digital Transition'' including Broadband investments. While component shortages may impact sales near term, and the US and EU funds may not find their way into the market until 2023, stimulus should be a contributor to demand out through 2027. Nokia''s profitable IP Routing business (12% of sales) should also benefit. Cash flow levels sustainable, and likely to grow. Equity undervalued. Outperform. We believe bearish views that Nokia is set to see revenue declines, and a FCF collapse, to be unfounded. Mobile Access will be supported by ongoing strong 5G roll outs in the US, with builds at an early stage in Europe, Japan, India and Brazil. Share gains against Chinese vendors are increasingly likely. Standalone 5G networks are only now starting to be rolled out globally, which will also drive growth in Nokia''s Software business within Cloud and Network Services (CNS) as 5G Mobile Core deployments accelerate (Nokia has won 150+ deals). We see the LTM FCF of EUR2.5bn...
Nokia has published strong Q3 results, putting aside concerns about profitability levels due to the loss of the Verizon contract a year ago. Although it has had some consequences on the Mobile Network segment numbers, Nokia has generated growth in all other sectors through the emphasis on new technology.
Another strong earnings beat with impressive FCF generation Nokia delivered a +20% consensus beat on adj. EBIT (we expected a 17% beat), driven by higher operating margins in Mobile Networks (7.3% versus 4.4% consensus estimates) and Cloud and Network Services (4.1% versus 1.9%). Even after excluding additional EUR40m boost from venture gains, adj. EBIT is still a 12% beat. Management also now expects to reach top-end of 10-12% operating margin guide in FY21. FCF generation was impressive, with LTM FCF reaching EUR2.5bn. The stock is trading on nearly 8% FCF Yield on FY23e (using LTM FCF), and this is before the self-help restructuring, ReefShark ramp and IPR renegotiation. From a macro perspective, the 5G cycle remains healthy, with upcoming drivers being 1) Favourable government policy and stimulus (U.S. ''rip and replace'' and European stimulus), 2) Emerging markets e.g. India, 3) Europe, which is still behind on 5G spend ramp, and 4) Industrial internet and enterprise opportunity. Dividend reinstatement is also another catalyst with the board reassessing the company''s dividend policy after Q4. Supply Chain an ongoing issue, but manageable for now Management indicated supply chain has prevented them from hitting even higher sales growth, but currently remains manageable. Visibility remains low, and management has cautioned the impact of supply chain risks on margin expansion in 2022. However, these should start to ease in 2022 and further the CEO commented that these equipment sales are not ''lost'' but further pushed back as more 5G networks get built. Overall, we see this mostly as another attempt to keep consensus expectations in check after another big margin beat. Remain Outperform on Nokia. We see c.40% upside potential We make small changes to our overall revenue and operating margin estimates. Despite the successive earnings beats, improving profitability, strong FCF and healthy 5G cycles Nokia is still trading on c.8% FCF Yield (FY22e)...
Nokia has already warned the market that the results would be better than previously guided, and we were not disappointed! The results came in above consensus and guidance has been re-adjusted positively.
Strong Q2 earnings beat and guidance raise Nokia delivered a top line beat of 2%, a gross margin beat of 340bps and an operating margin beat of 510bps. The top line beat was across Mobile Networks, Network Infrastructure and Nokia Technologies. More impressive was the extent of the operating margin beats at Mobile Networks (10.5% vs 1.9% consensus) and Network Infrastructure (9.1% vs 5.9% consensus), as the company continues to benefit from strong 5G rollout momentum, structural growth trends in Fiber Broadband Connectivity at Home and beyond (FTTx). Management has increased FY21 guidance but left FY23 guidance unchanged which we think is cautious given ReefShark self-help and broader 5G market momentum as the mid-point of guidance only implies 50bps increase in operating margins between FY21-FY23. FY21 operating margins are now guided to be 10-12% (versus previously 7-10%) with ''clearly positive'' FCF (versus previously ''positive FCF''). Nokia has also successfully won 4% share in recent China 5G tenders (link), which is a positive signal of product competitiveness. Strong FCF generation underappreciated We recently upgraded Nokia to Outperform (link) as we see structurally higher and more sustainable FCF generation going forward. Despite the strong reversals driving working capital increases, Nokia still managed to generate positive EUR 77m FCF in Q2 (we were expecting negative FCF this quarter). LTM FCF amounted to EUR 2.3bn, and this is before IPR negotiation cash inflows and higher operating margins still to come. We increase our earnings estimates and our TP to EUR 7 (from EUR6.4) We increase our earnings estimates driven by higher operating margins at Mobile Networks, and now expect FY23 FCF (CFO-Capex) of EUR 2.3bn, generating a TP of EUR 7 at 5.5% FY23 FCF (CFO-Capex) yield. We remain Outperform on Nokia and continue to think that the market is underappreciating the strong FCF generation at Nokia with current share price indicating...
Nokia’s strong Q1’21 results and signs of stronger contract momentum suggest that the company is at an inflection point, especially in Mobile Networks. While a technology gap with Ericsson still exists, it seems to be narrowing. We believe company guidance for 2021 is likely to prove conservative and our forecasts are above the high end of the guided range. We also expect the turnaround to continue into 2022. Valuations are attractive, given the improving outlook. We, therefore, upgrade our recommendation from Hold to Buy and raise our target price to €5.5 from €3.3.
Good set of Q1 earnings Nokia beat Q1 top line expectations by 8% and recorded operating margins of 10.9% versus consensus expectations of 2.8%. Mobile Networks grew 2% ccy driven by strong 5G momentum particularly in North America. Within Networks Infrastructure, IP Networks (+22% ccy), Fixed Networks (+49% ccy) and Submarine Networks (+57% ccy) delivered strong revenue growth. IP Networks benefited from the semiconductor supply chain crunch, where Nokia won customers from competitors that have not been able to deliver shipments. Strong fiber and broadband demand more than offset declines in copper infrastructure within Fixed Networks. Submarine Networks continue to see order book momentum. Despite the strong Q1, Nokia left FY guidance unchanged but has pointed to achieving the top end of the margin guidance. This caution is driven by 1) ramping Verizon share loss impact throughout the year, 2) venture fund positive performance not recurring, 3) ramping of RandD, 4) OPEX in Q1 was lower than usual due to lower SGandA spend and reversal of loss allowances, and 5) upcoming cash flow impacts of inventory builds and incentive payments. Verizon impact to ramp throughout the year While North America demonstrated strong 5G momentum in Q1 for Mobile Networks, management commented that the Verizon impact started in the second half of 4Q20 and is expected to increase throughout this year. This will also contribute to less than expected revenue seasonality for the rest of the year. Pricing pressures in North America (separate from Verizon loss) are also expected to persist throughout the year, suggesting Q1 was not the peak of headwinds. Remain Neutral on Nokia, but raise target price Nokia executed well in Q1, but the Verizon impact is expected to ramp throughout the year, 1Q OPEX was called out to be lower than usual with RandD also expected to ramp, and it remains to seen whether benefits seen at IP Networks due to the semiconductor crunch is...
Nokia posted an excellent set of results, with better-than-expected sales driven by unexpected growth in Networks. The positive contribution of this segment to EBIT is a positive surprise.
4Q20 earnings beat from exceptionals, potentially pulling forward from Q1 Nokia delivered an earnings beat in Q4, with revenues 1.9% higher than consensus expectations and with operating margins of 16.6% versus consensus expectations of 14.8%. However, the beat was driven by exceptionals 1) EUR 150m early revenue recognition in Mobile Access (initially scheduled for 2021), and 2) EUR 100m positive benefit from their venture fund fluctuation. Q4 also benefitted from earlier than expected cash collection of EUR500m. CMD review - 2021 the year of reset At the 19 March CMD, Nokia detailed financial targets for the new segments. From a broader market standpoint, the overall addressable market is expected to grow at a CAGR of 1% to 2%. From a margin perspective, the largest improvements are expected to come from the Mobile Networks and Cloud and Network Services segments. Mobile Networks margins are expected to improve from 0.5% in 2021 to 6.5% in 2023 (at mid-point), and Cloud and Network Services margins are expected to improve from 4.5% in 2021 to 9.5% in 2023. On a group level, the company is targeting 7% to 10% comparable operating margins in 2021, expanding to 10% to 13% in 2023. Nokia will report Q1 on Wednesday morning. 1Q21 earnings vs consensus This will be the first set of results Nokia will report under its new business mix breakdown. We are 3% below consensus on revenues as we see headwinds from FX, the loss of Verizon business and the continued ramping down of China revenue. Q1 could see FX headwinds as large as 5% due to the relative strengthening of the EUR. We are 2pp above consensus on gross margin and 1pp above on operating margin, but we are EUR100m below consensus on net cash. Remain Neutral. Start of a restructuring journey 2021 is expected to be a tough year for Nokia due to the loss of RAN business from Verizon combined with pricing pressures in North America. From a timing perspective, management also commented we are...
CMD overview: Cost cutting, digitalisation, RandD investments and product competitiveness Nokia held its CMD yesterday, further detailing financial targets, strategy and broader market outlook for the four new business groups. On a high level, the messaging remains the same with 2021 being the tough, ''reset'' year as the company faces revenue headwinds and pricing pressure while attempting to restructure the business. Nokia will cut 5,000 to 10,000 jobs and redirecting the cost savings to higher RandD spend and salary inflation. In terms of financial targets, the company has additionally disclosed 1) Breakdown in margin targets for the four different business groups in 2023, 2) Addressable market and segment sales growth indicators, 3) Margin targets for the group as a whole in 2023, 4) FCF indication in 2023, and 5) ROIC targets for both 2021 and 2023. Despite the restructuring, Nokia expects to remain cash flow positive, which we saw as a positive. Segment targets in greater detail as Division leaders take on more responsibility Across Mobile Networks, Network Infrastructure, and Cloud and Network Services the addressable market is expected to grow at a CAGR of 1% to 2%. The biggest margins improvements are expected to come from the Mobile Networks and Cloud and Network Services segments. For Mobile Networks, the company is targeting a margin recovery from a range of -1% to +2% in 2021 to a range of 5% to 8% in 2023, driven by a combination of gross margin expansion, restructuring and higher volumes. For Cloud and Network Services, it is targeting margin expansion from a range of 3% to 6% in 2021 to a range of 8% to 11% in 2023, driven by restructuring, higher volumes and mix. Group operating margins are expected to lift from 7-10% in 2021 to 10-13% in 2023. Nokia at the start of a 3-year journey, but cash flows expected to stay positive In 2021, Nokia is expected to face strong headwinds from the loss of RAN business at Verizon that will persist...
Upcoming CMD (Thursday) - Near term focus more on non IFRS operating margins Nokia is set to hold its Capital Markets Day on 18 March 2021, and has pre released its newest restructuring plans today. The company will take a further EUR600m of charges to lower headcount by 6-11% (5-10k jobs). Those savings will largely be reinvested in RandD. It has been 7+ months since Pekka Lundmark took over as CEO, and as we feared, there is no magic bullet to turning around Nokia''s share losses in mobile networks. There look to be no divestitures, rather more cost cutting. To date, the messaging has been that 2021 will be a challenging year, and a start of a longer term recovery journey. The company''s new 2021 CEO remuneration policy, under short-term incentives have 1) removed revenue as a metric (previously 20% weighting), 2) removed free cash flow as a metric (previously 40% weighting), and 3) increased operating profit weighting (increased from 40% weighting to 70% weighting), making a restructuring plan likely. A new three year restructuring plan announced today EUR600-700m restructuring charges are expected to be incurred of which 50% in 2021, 15% in 2022 and 35% in 2023. This is in addition to EUR500m of restructuring charges that are still to come from previously announced restructuring plans. The cost base will fall by an additional EUR600m by end of 2023 which will be offset by higher RandD and salary costs. RandD is expected to be focused on Mobile Networks and Network Infrastructure. 2021 targets remain unchanged. We expect that the current restructuring, and corresponding cashflow impact, will make a dividend resumption unlikely until after 2022 (i.e. two years from now). Nokia likely to try to position itself as a vRAN leader, but the payoff may take a while Nokia announced on Monday three deals with the hyperscalers (AWS, Azure, GCP), displaying its multi-cloud approach to integrating its virtualized networks with the hyperscalers'' edge compute...
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Nokia management has guided to a weak 2021 due to market share losses and price pressure in the US, as well as on going investments to build up its competitive position in Mobile Networks. Despite this low guidance, the risk to results this year remain to the downside in our opinion. We believe Nokia’s market share can erode further versus Ericsson, while RAN gains over Huawei are likely to come with margin pressure. Investments could also be raised further as management rightfully focuses on the longer term. Senior management flux is another concern for us. We expect evidence of a turnaround to come through only by 2022 and remain cautious on the stock.
Exceptionals drove the Q4 beat Nokia reported Q4 revenues 1.9% higher than consensus with operating margins of 16.6% also better than consensus expectations of 14.8%. However embedded in the results were two positive contributions, 1) EUR150m positive benefit from an early revenue recognition within mobile access (initially scheduled for 2021), and 2) EUR100m positive benefit from the venture fund fluctuation. Excluding the EUR150m benefit, Q4 Network margins would have been around 7.8% (350bps below consensus expectations). The other EUR100m gain was driven by Nokia Growth Partners investments recording higher share prices from recent IPOs. FCF also benefitted by EUR500m from an early customer prepayment. Mobile access network to be heavily impacted in 2021 by Verizon loss 2021 will be another weak year for mobile networks, with company guiding for a ''significant decline'' primarily driven by recent market share losses (Verizon) in North America, as well as the continued wind down of Chinese mobile access footprint. On top of market share losses, the company also expects price erosion in the US. When asked about further market share trends, management commented it was too early to say whether 2022 will see better market share trends for Nokia, but the company claims to be making progress on the competitiveness of its technology, and sees share gain potential vs Chinese vendors in Europe. 2021 margin guidance assumes other segments (ex-mobile) will offset the margin weakness in mobile networks (guided for 0%). FX will also be a revenue headwind. Remain Neutral and roll forward target price to EUR3.5. CMD next catalyst With strong sector headwinds, loss of market share in North America coupled with pricing pressure and lack of further clarity on new segments strategy, we remain Neutral. Next event is the Capital Markets Day on 18 March where we should get more clarity on the new individual segments, and potential action steps. We roll forward...
Nokia released a decent set of results, with a slight positive surprise on both sales and profitability. Going forward, the guidance is in line with estimates.
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Nokia management outlines strategy, with limited details Pekka Lundmark was named CEO nearly eight months ago. Coming from Fortum, the architect of the EUR6bn+ transformational acquisition of Uniper, we believe some investors were hoping that this ''deal man'' would have answers. While only being in the job for three months, he has had time to review Nokia''s strategy, and devise a plan to re-establish Nokia as a cash generative global networks leader. Yet, yesterday''s announcement was limited to an operational re-organisation, the guidance for several hundred million euros more of RandD, and hope that political pressure on their Chinese competitor would persist. Nokia acknowledged that its failure to be chosen as a 5G supplier by Verizon, and its being shut out of China 5G, will make 2021 ''challenging''. We did not expect much more and ramping up RandD in order to take advantage of Huawei''s upcoming market share loss was the right decision. We wonder if the RandD ramp-up is enough. In our recent report (Awaiting Pekka Lundmark''s Mario Draghi Moment) we had already increased RandD by EUR500m over two years for Nokia to match investments by Ericsson, Juniper and Ciena. So is that it? We doubt it. Pekka Lundmark stated that he would do ''whatever it takes to win in 5G''. Standing each of the Networks businesses on their own two feet opens the door to a future divestiture, with the Optical business being the most likely candidate. In addition, a strategy session is scheduled for 16 December. We expect the announcement of restructuring charges as Nokia sheds datacenters and moves its internal IT to Google Cloud Platform, and as the reorganisation triggers other departures. This, along with falling revenues in 2021, lower margins and the reversal of working capital outflows is likely to send cash flow generation lower again. Upgrade to Neutral as shares fall below our target price Our estimates come down to reflect a greater fall in 2021 revenue (from -2%...
Overall, Q3 results were not exciting and the outlook was clearly disappointing. We see downward pressure on our estimates owing to the new guidance provided by the management. We will therefore trim our estimates.
Nokia’s new management have given an initial view on the turnaround plans for the company. While the plan seems sensible, success will depend primarily on execution. By lowering profitability expectations for 2021, management have given themselves greater room to increase R&D investments in Mobile Access in a bid to catch up with Ericsson and Huawei on technology, without the accompanying pressure of trying to increase profitability. However, for the next few quarters we do not see much scope for positive surprises amidst increased competition with Ericsson for footprint. We have reduced our forecasts following new company margin guidance and cut our target price to €3.3 from €4.
Nokia''s mobile access market share continues to fall, with no support in sight Dell Oro data for Q2 shows that Nokia''s global market share has hit a new low at just 17%, less than half of what it was a decade ago. While the RAN market is booming (Dell Oro now expects 8% growth this year, revised up from 4%) Nokia is seeing declines (-3% YTD). The problem is not only China, where Nokia is on its way to zero RAN share, but also the US, where Nokia is set to see its 5th straight year of share loss, and could possibly lose even more share with Verizon. When 5G timelines accelerated, Nokia focussed on cost cutting while competitors invested to meet customers'' demands. Nokia is suffering as a result, and new management needs to act quickly. Huawei pressure creates opportunity, but reputational damage has created concerns As the US government tightens its stranglehold on Huawei and ZTE, operators and governments are crying out for alternatives. While Ericsson is now re-established as the clear mobile access leader outside of China, Samsung has had limited success outside of Korea, and disruptive Open RAN providers are still years from being reliable at scale. Operators and governments want Nokia to step-up; however, the product and project missteps of the past few years have created doubts about Nokia''s ability to deliver. More than anything, new CEO Pekka Lundmark needs to turn that perception around and show customers (such as Verizon) that Nokia will do ''whatever it takes'' to re-emerge as a reliable 5G partner with a credible long term product road map. We expect a new investment plan to be launched, with estimates to come down near term Nokia can no longer cut or divest its way to growth. Nokia needs to accelerate its RandD investments to not only ''catch up'' but to attempt to leapfrog Ericsson, Huawei and ZTE. Our analysis shows a EUR500m hole in Nokia''s RandD budget that needs to be filled. We believe a capex ramp may also be needed to expand...
Nokia’s gross margin improvement in Q2 was impressive and increased confidence in the company’s future earnings ability. Contract-related discipline and the increasing proportion of Reefshark-based shipments are expected to further support gross margins going forward, compensating for possible product mix volatility. However, falling revenues are a concern amidst signs of on-going market share losses, even outside China. This may limit the level of operating margin improvement. We also expect some changes in strategy from the new management. We remain neutral, raising our target price from €3.6 to €4.0
Management anticipates the majority of COVID-19’s impact to come through in Q2’20, owing to disruptions on both the demand and supply side. Whilst FY20 targets have been reduced slightly to reflect this, we believe the business will struggle to achieve the mid-point of the new targets in the current environment. The strong performance of Nokia Software and the margin improvement in Mobile access is encouraging, but we believe the lack of Chinese 5G RAN market share makes a full turnaround in Mobile access more challenging. We retain our caution until there is evidence of a sustainable improvement in margins and cashflow.
Nokia’s management have called out Mobile Access and cash generation as the two areas the company is keenly focused on. In Mobile Access we believe Nokia faces a tough road given competition from Ericsson and Huawei, uncertainty in India, its reduced involvement in China and some share losses in other markets. While the shift to ReefShark-based product is expected to help raise margins, the transition will take over 3 years. On the positive side Nokia Software is now a major and growing contributor to earnings.
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By putting in realistic margin expectations for 2019 and 2020, Nokia has now contained further downside risks to the stock. There is also no doubt that the plan to increase 5G investments, accelerate product roadmaps and cost reductions is the right one for the company to take.
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We forecast Nokia's profitability to improve sharply through the remaining three quarters of the year, but still expect the company to miss the low end of its guided operating margin range of 9%-12% and EPS range of €0.25-0.29. To achieve its target the company will need to see a major improvement in its Mobile Access business and as yet there no evidence that this will happen in a consistent manner over the next three quarters.
Though Nokia should be seeing the benefits of the 5G upcycle, the company's guidance and management comments suggest that this may be somewhat muted through much of 2019, during which time the margins of the business are likely to be under pressure. On the positive side the IP routing and the software businesses seem to be gaining momentum, with software especially expected to be a driver of profitability and earnings going forward.
Nokia's Q4'18 sales were above our forecasts, with operating income and EPS coming in-line with expectations. The company met the low end of its 6%-9% margin guidance for 2018, helped by margin strength in Global Services and IP Networks compensating for weaker profitability in wireless.
