The News: Nokia (NYSE: NOK) reported its second quarter (Q2) and half-year 2023 results on July 20, 2023. Nokia posted Q2 net sales flat year-over-year (YoY) in constant currency (-3% reported). Enterprise net sales grew 27% YoY in constant currency (25% reported). Comparable gross margin declined 180 basis points (bps) YoY to 38.8% (reported decline 200 bps to 38.2%). Read the Nokia press release here.
Nokia Fiscal Q2 and Half Year 2023: Showing Resilience Amid Macro Uncertainties
Analyst Take: Nokia President and CEO, Pekka Lundmark, highlighted the company’s Q2 2023 results around its delivery of stable net sales in constant currency compared to 2022. This includes prudent management of company costs that delivered a solid comparable operating margin of 11.0% despite the regional headwinds encountered by its Mobile Networks business.
For Nokia, after factoring in the substantial decline in major North American communications service provider (CSP) investment, its operating margin proved resilient, even adjusting for the €80 million of catch-up net sales in Nokia Technologies. From our view, the key positive of the quarter was the long-term patent license agreement with Apple, boosting Nokia’s smartphone license renewal cycle and mobile ecosystem credentials. Plus, Nokia’s performance in Enterprise, with net sales increasing by 27% in constant currency, confirms the company’s ongoing execution of making inroads in a top priority market segment.
Additional Key Fiscal Q2 2023 Financial Highlights Included:
- Comparable gross margin declined 180 bps YoY to 38.8% (reported declined 200 bps to 38.2%) due to regional mix in Mobile Networks, partly offset by a strong Network
- Infrastructure margin and catch-up net sales in Nokia Technologies.
- Comparable operating margin declined YoY by 120 bps to 11.0% (reported decline of 130 bps to 8.3%), due to the identified gross margin factors, partly offset by lower operating expenses and higher other operating income.
- Comparable diluted EPS of €0.07; reported diluted EPS of €0.05.
- Free cash flow negative €0.4 billion, net cash balance of €3.7 billion.
- As announced on 14 July 2023, Nokia now expects full year 2023 net sales in the range of €23.2 billion to €24.6 billion with a comparable operating margin in the range of
11.5% to 13.0%.
Nokia Fiscal Q2 2023: Segment Perspectives
Nokia’s Network Infrastructure business registered a 6% decline in net sales (constant currency), which the company attributed to macro uncertainty, especially in IP Networks, which declined 11%. We are finding macro uncertainties are an ongoing industry-wide concern due to factors such as inflationary pressure and geopolitical turmoil such as the Ukraine-Russia conflict’s impact on energy supplies, for instance.
Nokia’s Mobile Networks business continued to gain from 5G deployments in India, offsetting ongoing sales development decline in North America, delivering 5% net sales growth in constant currency. Notably, gross margin was mostly in line with Q1 2023 and sustained cost discipline led to an operating margin of 7.9% in Q2 2023. Plus, some major CSPs are dialing back their 2023 CapEx plans. For example, Verizon is pulling back from $23.1 billion in 2022 to no more than $19.25 billion in 2023. Deutsche Telekom, parent company of T-Mobile, is planning to reduce its CapEx from $22.1 billion in 2022 to a projected $16.8 billion in 2023. This trend is already impacting Nokia sales development in North America.
Nokia Sales Development by Region
Nokia saw a decline in Fixed Networks, driven by fixed wireless access (FWA) and some modest inventory management, although we expect that fiber demand will remain robust due to factors such as the US government’s ongoing allocation of designated such as the Rural Digital Opportunity Fund (RDOF). As such, Nokia reported Optical Networks saw continued strength with 16% growth.
Nokia Cloud and Network Services attained net sales growth of 2% in constant currency and provided a 2.2% operating margin in the quarter.
Nokia Fiscal Q2 2023: Red Hat Alliance Helps Drive Portfolio Rebalancing
We are encouraged that Nokia and Red Hat reached an agreement to integrate Nokia’s core network applications with Red Hat OpenStack Platform and RedHat OpenShift. 350 personnel at Nokia will be transferring to Red Hat as Nokia moves on from developing the platforms that host its software. The partners will jointly support and evolve existing Nokia Container Services (NCS) and Nokia CloudBand Infrastructure Software (CBIS) customers while developing a path for customers to migrate to Red Hat’s platforms.
Also, we see Nokia’s private wireless portfolio further bolstering its overall competitiveness. Specifically, Nokia’s Digital Automation Cloud (DAC) has a demonstrated track record in meeting the distinct private wireless requirements of the transportation and logistics market segment including ports, airport networks, highways, and railroads. Nokia’s DAC delivers the real-time monitoring of operations and asset tracking as well as other key capabilities such as geo-positioning of vehicles, IoT sensor analytics, and remote operations that organizations are prioritizing in their private wireless implementations.
For instance, Nokia has reported a private wireless network customer base of 595 customers that power 1,500+ mission-critical networks across the transportation and logistics segments of the industrial market including airports, mines, ports, and utilities.
Nokia Fiscal Q2 and Half Year 2023: Key Takeaways
In addition to macroeconomic concerns, Nokia is addressing the inventory digestion impacting customer spending, intensifying in Q2 2023. In the second half (H2) Nokia expects these trends to continue to impact the company’s business. As such, H2 2023 net sales are expected to be similar to the first half in both Network Infrastructure and Mobile Networks, with some sequential improvement visible into Q4 2023. As a result, Nokia reduced its net sales outlook for 2023 to €23.2 billion to €24.6 billion from the prior €24.6 billion to €26.2 billion.
Looking beyond 2023, in Network Infrastructure, Nokia believes these impacts are mostly short-term and that moving forward, Nokia anticipates growth opportunities. We find Nokia’s strategic commitment to further diversify its customer base in key segments such as enterprise and web scale to be integral to improving its overall fiscal outlook. In Mobile Networks, we find there is mounting business justification for operators to invest in 5G globally as only 22% have implemented 5G Standalone (SA), key to unleashing 5G’s full monetization potential. Overall, we expect that Nokia’s overall competitiveness and fiscal performance will benefit from the advancement of 5G network capabilities on a global basis.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other insights from The Futurum Group:
Nokia and Verizon Shine Spotlight on Key Private Wireless Use Cases: Transportation and Logistics
Nokia Fiscal Q1 2023: India 5G, Optical, and Enterprise Shine
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Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
Ron is an experienced, customer-focused research expert and analyst, with over 20 years of experience in the digital and IT transformation markets, working with businesses to drive consistent revenue and sales growth.
He is a recognized authority at tracking the evolution of and identifying the key disruptive trends within the service enablement ecosystem, including a wide range of topics across software and services, infrastructure, 5G communications, Internet of Things (IoT), Artificial Intelligence (AI), analytics, security, cloud computing, revenue management, and regulatory issues.
Prior to his work with The Futurum Group, Ron worked with GlobalData Technology creating syndicated and custom research across a wide variety of technical fields. His work with Current Analysis focused on the broadband and service provider infrastructure markets.
Ron holds a Master of Arts in Public Policy from University of Nevada — Las Vegas and a Bachelor of Arts in political science/government from William and Mary.
