- Nokia's first quarter results were mixed, even as margins improved on a higher mix of software sales and strong cost controls.
- Although Europe remained challenging during a seasonally weak first quarter, the company has built a strong pipeline of orders on a number of recent contract wins, which could bolster sales going forward.
- Our $7.30 price estimate for Nokia is about 10% below the current market price.
Nokia (NYSE:NOK) announced a mixed set of first quarter results last month as revenues declined 15% year-over-year to EUR 2.3 billion, even as margins improved on a higher mix of software sales and strong cost controls. The company continued to witness a decline in networking services revenues on account of the divestment of non-core businesses and exits from low-margin contracts. This was partially offset by a marginal increase in mobile broadband net sales, which were driven by high 4G LTE demand in regions such as China and Western Europe.
Although Europe remained challenging during a seasonally weak first quarter, the company has built a strong pipeline of orders on a number of recent contract wins, which could bolster sales going forward. At the start of the year, Nokia inked a major deal with Russia’s third largest telecom operator, VimpelCom Ltd., to provide network equipment and services for expanding its 4G network in central and southern Russia, most of the Ural and Volga regions as well as Siberia. The company also renewed its contract with Chunghwa Telecom (NYSE:CHT) in December last year, to help in its capacity expansion to the HSPA+ network in the region. Chinghwa Telecom, Taiwan’s largest telecom player, is looking to launch 4G services very soon and has selected Nokia’s network division (NSN) as its primary equipment supplier.
In more recent developments, NSN bagged a five-year deal from Telenor last week to provide radio access network (RAN) equipment and services to expand its 2G, 3G and 4G network across Europe and Asia. The company also recently sealed a deal with Algeria-based Algérie Télécom to deploy North Africa’s first commercial LTE network. Nokia is routinely rated among the top LTE solution providers in the industry, highlighted by the fact that it is a LTE RAN supplier to eight out of the ten largest 4G providers (measured by subscribers) in the world. Nokia uses a unique Single RAN Advanced technology, based on the Flexi Multiradio 10 Base Station, which helps reduce roll-out time as well as costs.
Going forward, we also expect the company to gain significantly in the U.S. and Chinese wireless markets, with carriers such as Sprint (NYSE:S), China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA) expected to substantially increase their network spending. NSN has done well in winning LTE contracts with China Mobile and China Telecom, and is on track to become the leading foreign player in the Chinese LTE buildout. These deals have started bringing in revenues, with China being the only region worldwide in which NSN saw yearly growth in revenues last quarter. In Europe, NSN has won two large LTE contracts with Everything Everywhere and Vodafone (NASDAQ:VOD), which should help stabilize revenues in the second half of the year. Although European sales have been slow to recover, the deal pipeline looks strong as carrier spending returns amid receding macroeconomic uncertainty.
Our $7.30 price estimate for Nokia is about 10% below the current market price.
Disclosure: No positions.