Nokia (NOK, Financial) posted strong sales in the first quarter-fiscal 2015. After divesting its struggling mobile phones business to Microsoft (MSFT, Financial), the Networks division became the core operations of the company. The communications equipment company posted sales growth of 20% year over year to clock 3.2 billion euros, or $3.6 billion. The top-line growth was on the back of strong performance in the Nokia technologies division and also growth across all segments of the company. Consensus estimate for the top-line was pegged at $3.2 billion.
Muted software sales and challenging market conditions lead to Nokia’s main unit registering a 61% year-over-year decline in operating profit. As a result, Nokia’s operating margin declined to 8.3% versus 11.4 in the year-ago quarter. Hence, in the first-quarter Nokia reported earnings of €0.05 per share and came in line with analysts’ expectations, but grew 25% year over year. However, a sharp decline in operating profit of the core operations of Nokia spooked the investors and shares tanked after the results, losing over 13% year to date.
Consolidating the networks segment
In order to bolster its networks division, Nokia has announced that it will be buying out its French rival,Ă‚ Alcatel-Lucent (ALU, Financial) in a deal worth over $16 billion and is expected to close in first half of 2016. According to a release:
“With more than 40 000 R&D employees and spend of EUR 4.7 billion in R&D in 2014, the combined company will be in a position to accelerate development of future technologies including 5G, IP and software-defined networking, cloud, analytics as well as sensors and imaging.”
"I’ve met with many customers over the last two weeks and every single one has expressed their support. They see it as a way to ensure three strong global competitors and not as a reduction in competition. They see it as a way to protect their investments of the past while enabling the needed innovation in future technologies and services. They see the portfolio mix of the two companies as compelling and well-suited to meeting their future requirement," Rajiv Suri, President & CEO, said on a call after first-quarter results.
He also went on to say:
“We are now in a cycle between 4G and 5G and the timing of this deal will allow us to accelerate spending on 5G immediately upon closing. In addition, the combined portfolio will put the company in an excellent position as the transition to cloud accelerates.”
This combined entity – called Nokia Corporation – will be the second-largest mobile equipment manufacturer in the world with 35% market share, next to Swedish giant Ericsson (ECI) which holds around 40% of market share.
Divesting HERE?
Nokia announced that it is contemplating selling off its HERE segment. The main idea of divesting this business segment is to get ready to focus entirely on its core business – Networks division – after acquisition of Alcatel-Lucent, and improve its debt rating from “junk” as a result of this sale. However, this is not a desperate sale, so it will only be sold if Nokia gets the right price.
According to a New York Times (NYT) report:
“Uber has submitted a bid for Here, the main competitor to Google Maps, for as much as $3 billion, according to three people with knowledge of the offer, who spoke on the condition of anonymity.
The bid is competing with one in the works from a consortium of German automakers, including BMW, Audi and Mercedes-Benz, according to two of those people. The automakers are teaming up with the Chinese search engine Baidu (BIDU, Financial) on the offer, the people said.”
Nokia’s mapping business controls more than 80 percent global market share for built-in car navigation systems.
Looking forward
For the long-term on Nokia Network's non-IFRS operating margin guidance continues to be 8% to 11%. The combined entity with Alcatel-Lucent is expected to achieve around EUR 900 million of cost synergies in 2019.
Overall, the company feels that it is well positioned to well positioned to achieve the fiscal 2015 growth targets and net sales for all three divisions combined is projected to increase in 2015 on a year-over-year basis.
Wrapping up
Nokia is on the road to focus on its core business and with acquisition of Alcatel-Lucent it will create the second largest entity in the mobile equipment industry. For the next five years, growth is pegged at a CAGR of 8.67% versus a decline of 19.77% during the past five years. With a dividend yield of 2.9% and Nokia positioning itself for the future, the stock is a buy for long-term gains. Buy and hold is the key.
