Argus Says Nokia Faces Near-Term Headwinds, But Remains Well-Positioned

Argus’ Jim Kelleher believes the Q2 results reported by Nokia Corp (ADR) NOK highlight the challenges within the mature wireless networks market, which is poised between decelerating 3G/4G demand and the imminent 5G.

Kelleher reiterated a Buy rating on the company, with a price target of $10.

The analyst pointed out that 2Q16 was the first period that reflected the full inclusion of the recently acquired business from Alcatel Lucent SA (ADR) ALU.

For Q2, Nokia reported an 11 percent year-on-year revenue decline with an 11 percent decline in revenue in the Networks segment.

Mobile networks accounting for about 80 percent of the overall sales decline in the segment, while Fixed networks’ revenue remained positive.

“IP Networks & Applications, including the former ALU IP routing, optical, and applications businesses, also posted lower revenue in 2Q. Revenue declined in all regions, particularly in emerging markets,” Kelleher stated.

The company reported a slight non-IFRS profit for the quarter, while reporting a loss on an IFRS basis.

Challenges

Although the current business and spending levels suggest Nokia was likely to remain challenged in expanding margins in the current environment, the analyst pointed out that it was still in the early stages of the restructuring process associated with the Alcatel-Lucent acquisition. This process was likely to help drive margins and earnings over time.

Kelleher also stated that the company expects to cut costs by €1.2 billion by 2018, up from the earlier target of €900 million.

“We expect the combined company to face near-term challenges, but believe that it is well positioned for the development and rollout of 5G networks over the next several years,” the analyst added.

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