Nokia Earnings: Sales Strength, Margin Weakness, and an Ominous Statement About Customer Spending

Although it endured similar headwinds, Nokia’s NOK first-quarter results were much better than rival Ericsson’s, all things considered. Nonetheless, Nokia’s stock sold off just as much in response to the first-quarter report. More than margin weakness or the fact that first-quarter sales benefited from tailwinds that will not persist throughout the year, we attribute the selloff to management stating it sees signs of the economic environment impacting customer spending. Any near-term fluctuations in revenue growth will have little impact on our long-term view. Regardless of timing, we expect Nokia to benefit from 5G and future wireless upgrade cycles but believe its business will remain cyclical. We don’t project much long-term sales growth, on average, but we still think the stock is materially undervalued relative to our EUR 6 fair value estimate.

Similar to Ericsson, Nokia experienced a slowdown in North America mobile carrier spending while benefiting from a surge in India. It also posted good growth in the Middle East, Africa, and Latin America. Unlike Ericsson, which saw customers reduce inventories they had built up when supply chains were more disrupted, Nokia, on net, benefitted from customers rebuilding inventories that Nokia couldn’t fill when supply chains were disrupted. In total, while Ericsson reported flat organic revenue in constant currency during the first quarter, Nokia’s organic sales growth was 9% in constant currency. We expect Nokia’s revenue growth rate to slow dramatically throughout the year, when the inventory normalization ceases to be a tailwind and a slowdown in mobile network spending outside North America prevents it from offsetting the North American slowdown so substantially.

Generally, Nokia controlled costs very well, but the geographic mix shift and a sizable reduction in Nokia Technologies revenue, which consists of intellectual property licensing, resulted in an operating margin contraction of 270 basis points year over year.