Nokia’s Q4 2016 numbers revealed a fall in revenues but margins that exceeded expectations, allowing for an optimistic outlook and a small share spike.
The dominant underlying theme for 2016 was the assimilation of Alcatel-Lucent, which Nokia says was completed ahead of schedule. One of the by-products of this seems to have been rapid realisation of the ‘synergies’ that are always listed as one of the key features of major M&A activity.
In other words, Nokia has done a good job of resolving duplicate jobs and generally cutting costs. It shares this skill with Ericsson, which regularly announces how well its streamlining efforts are going. There are clearly a lot of networking professional on the job market right now – maybe they should all get together and create a new company.
Profit is the product of revenues minus overheads and, with revenues declining, the rapid resolution of the A-Lu acquisition has yielded margins at the higher end of guidance, lifted Nokia’s share price by around 3% at time of writing, and allowed Nokia CEO Rajeev Suri to make optimistic noises in its earnings commentary.
“At the start of the year, Nokia was focused primarily on mobile networks,” said Suri. “We ended the year as a company with a complete portfolio spanning mobile, fixed, routing, optical, stand-alone software and more; with solid opportunities to drive higher returns through expansion into new customer segments; with emerging businesses in digital health and digital media; and with greatly expanded patent and brand licensing activities.
“Pleasingly, we saw growing customer support for Nokia’s strategy. Our sales pipeline with customers beyond our traditional communication service provider base accelerated over the course of the year, we saw an increasing share of our networks pipeline coming from opportunities covering products and services from two or more of our business groups, and the potential of cross-selling started to become a reality.
“We also ended the year having successfully concluded the integration of Alcatel-Lucent faster than anticipated, allowing us to shift our full focus to cost savings, continuous improvement programs and the execution of our strategy. In terms of financial performance, we were able to deliver solid results for the full year, with profitability in our Networks business coming in at the high end of our guidance range.
“Our ongoing intense focus on execution, cost management and pricing discipline was critical to offset the impact of challenging market conditions over the course of the year. While I remain disappointed with our topline development in 2016, we continue to expect our performance to improve in 2017 and see the potential for margin expansion in 2017 and beyond, as market conditions improve and our sales transformation programs gain further traction.
“In short, we ended 2016 positioned well for the future, with well-integrated operations, a powerful end-to-end portfolio and our disciplined operating model still delivering robust results. In addition, we remain in a position of financial strength, with a strong balance sheet and the flexibility to invest in opportunities that we believe will create shareholder value.”
Suri didn’t detail his reasons for expecting market conditions to improve, at least in the core networking segment. 4G is now mature and 5G is still years away so where is this increased demand going to come from? Like Ericsson, Nokia is hoping to lessen its reliance on CSPs for its revenue, but opening up those new verticals will also be a lengthy process. Read further analysis on Light Reading here.