BB:CC - Nokia Third-Quarter 2023 Earnings Preview: What To Expect

2023-10-16 09:10:38 ET

Summary

• Nokia's stock price has fallen ahead of its upcoming Q3/2023 earnings report.
• The company has cut costs and limited expenses, but revenue growth has been minimal.
• Nokia's growth and profitability grades have slipped, and analysts expect the company to miss lowered expectations in the upcoming report.
• Expected stock action post-earnings discussed.

When Nokia ( NOK ) last reported earnings on July 20, 2023, the stock price stabilized at just below $4.00. Its brief breakout above that last month proved short-lived. Ahead of the upcoming Q3/2023 report this Thursday, shares are meaningfully lower at $3.51. What should investors expect in the next report?

Second-Quarter 2023 Earnings

In July, Nokia reported revenue falling by 2.7% Y/Y to EUR5.71 billion . Gross margins fell as the firm earned EUR0.07 a share. The dividend, which had a forward yield of 3.41% at the time , is $0.033 after the currency conversion. The distribution is mostly symbolic. It reflects the firm's discipline in operating expenditure discipline and restructuring ahead.

Although expenses fell by 5% Y/Y due mainly to exchange rates, Nokia cut costs in several ways. It is limiting hiring, travel, and supply chain costs. While these lower costs will be reflected in the upcoming report, expect this trend to continue for the final quarter of the year.

Worryingly, Nokia's competitor, Ericsson ( ERIC ), talked about data traffic as a driver of demand and justifying future investments. However, revenue barely grew for Nokia. Chief Executive Officer Pekka Lundmark said that telecom operators are not particularly good at monetizing the data traffic growth historically. Investors in the telecom services are also skeptical. Verizon Communications ( VZ ) is down 22% YTD. AT&T ( T ) is down just almost as much, despite its dividend yielding 7.77%.

CEO Lundmark said that data traffic keeps growing at 20% to 30% annually . Unfortunately, customers are buying less compared to 2021-2022, during the supply chain crisis. In 2024, management expects investment levels to normalize.

CEO Lundmark said that operators have new tools like 5G slicing available. This helps them monitor data traffic more effectively. Nokia's customers will prioritize their investment in supporting such growth over monetization efforts. In addition, competition among operators is increasing. They will need to offer new services to differentiate their brand. This should position Nokia's customers to monetize data growth in the future.

Growth From 5G

Long-term investors will recall that communications equipment providers touted 5G as a catalyst for growth. But that sentiment has evaporated recently. Ciena ( CIEN ), a supplier of 5G hardware , posted revenue growing by 23% Y/Y in Q3/2023 . This is better than the 19% Y/Y growth in Q2/2023 . CIEN stock rallied to ~$50 last month only to retrace back to $42.00.

Nokia achieved increased market penetration for 5G in North America at over 50%. The 5G deployment is far from complete. Together with a market recovery in North America, the firm should benefit from deployment in other parts of the world (India, the Middle East, Africa, and Latin America). Readers might speculate that NOK stock fell on worries of war unfolding from the Israel and Palestine conflict.

In the Asia Pacific region, Nokia is in a strong position with operators. This includes KDDI. Still, CEO Lundmark did not quantify the outlook for the next year. Europe has healthy growth where the company is taking market share.

Risks

Nokia's bullish outlook is not without risk. European operators rely on the overall economic activity. If that weakens, European customers would scale back on capital spending. Furthermore, operators in Europe lack financial strength. Nokia's CEO admitted that it affected their investments in Q2.

Q3/2023 Forecast

Nokia earned an unattractive D+ on the earnings revision grade. Six analysts issued downward revisions in the last three months, compared to just one upward revision.

Analysts expect the company to earn $0.09 a share on revenue of $5.96 billion.

Nokia beat expectations only once in the last four quarters. Chances are moderately high that the company will miss lowered expectations. This is another reason why NOK stock lost 12.69% in the last month, as investors brace for disappointment.

Limited Opportunity

Nokia's growth and profitability grades slipped in the last 90 days. This further explains the weak stock price ahead of the earnings report this week.

Nokia joins Ericsson, Cisco ( CSCO ), Juniper ( JNPR ), and Ciena as stocks that appear to be in a bearish pattern.

Though it isn't a smartphone supplier, its former peer, BlackBerry ( BB ), is faring even worse. BlackBerry posted weak Q2 results , its Chief Legal Officer sold shares worth $72,200 , and it announced an IPO for its Internet of Things unit . The IPO negates previous rumors of a go-private sale of the company.

Takeaway

Investors should not expect much volatility after Nokia posts quarterly results. They should leave such speculation to traders. Instead, to justify holding the stock, Nokia needs to report a post-supply chain disruption rebound. It needs to post results that demonstrate market share gains translating to higher profits.

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