Nokia one of the largest mobile network equipment providers, has had a mixed 2018. While revenues declined modestly over the first nine months of the year, the company has been benefiting from traction in its technology licensing business, a gradually stabilizing network equipment market and solid cost reductions. Nokia’s stock price has risen by close to 20% year-to-date to levels of around $5.60 per share. In this note, we take a look at the year that was for Nokia and what lies ahead for the company in 2019.
Our interactive dashboard on what Nokia’s outlook is like details our expectations for the company over the next two years. You can modify any of our key drivers and assumptions to gauge the impact of changes on the company’s results and valuation.
Nokia Well-Positioned For 5G Growth
Nokia’s Networks business saw its sales decline 5% year-over-year over the first nine months of 2018 to about EUR 13.9 billion ($15.8 billion). While Nokia projects that the networking market will contract by as much as 3% in 2018, the company expects its primary addressable market to grow on a constant currency basis over 2019 and 2020, driven by the adoption of 5G technology. While North American operators have started some level of commercial 5G deployments this year, other markets including South Korea, China, Japan, and the Middle East are expected to commence their build-outs from 2019. Nokia could have an edge over rivals in 5G deployment, considering its increasing focus on end-to-end solutions following its acquisition of Alcatel Lucent, with its expertise including radio, core, optical as well as digital technologies.
Nokia Technology Business
Nokia’s licensing business saw revenues grow by 19% year-over-year over the last quarter, excluding a one-time catch-up payment it received last year. While patent royalties have accounted for a relatively small proportion of Nokia’s total revenues in the past, they are becoming more meaningful to the company due to their higher margins and new deals that the company is striking. For instance, Nokia has expanded its licensing operations to markets including Chinese mobile OEMs, who have been growing their global market share, and customers in the automotive sector. Nokia is projecting that its licensing business will see a compound annual growth rate of roughly 10% for its recurring net sales through 2020.
Aggressive Cost Cutting
Nokia has significantly cut costs through the downturn in the network equipment market. While the company is on track to meet its EUR 1.2 billion ($1.363 billion) cost savings program by the end of this year, it recently announced a new cost-saving initiative, with plans to cut costs at an annual rate of EUR 700 million ($795 million) by the end of 2020. The company is looking towards digitization automation and more process and tool simplification to drive savings while indicating that it would cut thousands of jobs across the globe. The cost-cutting could be crucial for Nokia to bolster profitability as it waits for the 5G upgrade cycle to contribute more meaningfully to its revenues. – Forbes