The News: Nokia published its interim report for third quarter (Q3) 2023 results October 19, 2023. Nokia Q3 net sales declined 15% year-over-year (YoY) in constant currency (-20% reported) as macroeconomic uncertainty and higher interest rates continue to pressure operator spending. Enterprise net sales grew 5% YoY in constant currency (flat reported). Read the press release on the Nokia website.
Nokia Fiscal Q3 2023: Adjusting to Macro Uncertainties
Analyst Take: Nokia President and CEO Pekka Lundmark stressed that the company’s Q3 performance demonstrated resilience in its operating margin despite the impact of the weaker environment on net sales. Over the past 3 years, Nokia has invested heavily to bolster its technological capabilities throughout its business to guard against the ongoing period of market balkiness.
Nokia continues to champion the mid- to long-term attractiveness of its markets. Specifically, substantial investments in networks that have greatly improved capabilities are essential for driving AI and cloud computing innovation and breakthroughs. Now Nokia is taking decisive strategic, operational, and cost actions to address the uncertain timing of an impending market recovery.
Initially, Nokia is accelerating its strategy execution by assigning business groups more operational autonomy. Second, Nokia is streamlining its operating model by embedding sales teams into business groups, and third, the company is resetting its cost base to protect profitability. Nokia is targeting between €800 million and €1.2 billion in cost savings by 2026 to keep on track to deliver its long-term target comparable operating margin of at least 14% by 2026.
As a result, Nokia is planning to reduce its workforce by 9,000 to 14,000 jobs by the end of 2026 to cut costs amid slowing demand for 5G solutions across key geographic regions such as North America due to factors such as persistent inflation and high interest rates.
Additional Key Fiscal Q3 2023 Financial Highlights
- Comparable gross margin declined 120bps YoY to 39.2% (reported declined 140bps to 38.7%) due primarily to regional mix in Mobile Networks. Sequentially, the Mobile Networks gross margin improved 140bps due to a favorable regional mix.
- Comparable operating margin declined YoY by 200bps to 8.5% (reported decline of 350bps to 4.8%), indicating the resilience of Nokia’s profitability relative to the net sales decline.
- Comparable diluted earnings per share (EPS) of €0.05; reported diluted EPS of €0.02.
- Free cash flow negative €0.4 billion, net cash balance of €3.0 billion, and working capital headwinds expected to ease starting Q4.
- Announced acceleration in strategy execution giving increased operational autonomy to business groups. An operating model change to embed sales teams into business groups. Target €800 million to €1,200 million gross cost savings by 2026.
- Nokia continues to expect full year 2023 net sales in the range of €23.2 to €24.6 billion with a comparable operating margin in the range of 11.5% to 13.0% assuming closure of outstanding deals in Nokia Technologies.
Nokia Fiscal Q2 2023: Segment Perspectives
Nokia’s Network Infrastructure business registered a 14% decline in net sales (constant currency) due to weaker spending affecting IP Networks while Fixed Networks was affected by the same challenge combined with customer inventory digestion, which the company attributed to macro uncertainty, especially in IP Networks, which declined 11%.
Nokia’s Mobile Networks net sales declined 19% due to moderation in the pace of 5G deployment in India, which presaged that the growth there was no longer enough to offset the slowdown in North America. Cloud and Network Services proved more robust in the quarter with a 2% decline and continued to benefit from strong growth in the Enterprise Solutions business.
On a different note, Nokia Cloud and Network Services attained net sales growth of 2% in constant currency and provided a 2.2% operating margin in the quarter. Plus, Nokia Technologies remains confident that its business group will return to a net sales annual run rate of €1.4 billion-€1.5 billion as the company works through the smartphone license renewal cycle and continues to grow in new areas.
Nokia Fiscal Q3 2023: Nokia Advances Portfolio Innovation
We are reassured that Nokia continues to make the portfolio moves that are key to strengthening its competitiveness and meeting its strategic objectives. The launch of Nokia Digital Automation Cloud (DAC) Private Wireless (PW) Compact provides a new configuration optimized to fulfill the private wireless connectivity demands of small- and midsize enterprise (SME) industrial sites.
With more industries moving toward digital transformation to improve their business processes, a compact version of Nokia’s private wireless solution can deliver security and reliable connectivity across a multitude of SME environments. The solution reinforces Nokia’s commitment to accelerate green energy adoption, including supporting up to 60% more energy efficiency than Wi-Fi, resulting in a considerably lower energy footprint.
Also, at MWC23 Las Vegas, Nokia launched its Network as Code platform and developer portal to accelerate network programmability and monetization by providing simplified network capabilities to developers as software code that can be integrated into applications. The move bolsters Nokia’s strategy of powering new business models that can unlock network innovations including sustainability, collaboration, and productivity improvements.
We view the Network as Code debut as demonstrating Nokia is cultivating the broad ecosystem support needed to make network programmability and application programming interface (API)-driven innovation integral to communications service provider (CSP) 5G monetization objectives and progress. As a result, we believe the Nokia Network as Code platform and developer portal can deliver the much-needed catalyst to ensure CSPs play an instrumental role in the business-to-business (B2B) digitalization ecosystem, including ensuring developers can play a critical role in cultivating more compelling applications and experiences for customers.
Moreover, Nokia is partnering with Sanmina Corporation to manufacture in the US several fiber optic broadband products at Sanmina’s manufacturing facility located in Pleasant Prairie, Kenosha County, Wisconsin, bringing up to 200 new jobs to the Badger State. By manufacturing fiber optic technology in the US, Nokia can supply its products and services to critical societal projects, such as the Broadband Equity, Access, and Deployment (BEAD) program, that directly address narrowing the digital divide in direct parallel with boosting job creation and economic growth.
Nokia Fiscal Q3 2023: Key Takeaways
Factoring in macroeconomic uncertainties, Nokia expects to see more normal seasonal improvement in its network businesses in Q4 2023. In tandem, Nokia expects to resolve the outstanding renewals affecting Nokia Technologies, setting the path toward the lower end of its net sales range for 2023 and the mid-point of its comparable operating margin range.
Overall, we believe Nokia is taking the right strategic, operational, and cost actions to directly meet the immediate challenges of present and foreseeable macroeconomic uncertainties in preparation for eventual improved macroeconomic conditions and an improvement in industry-wide mobile investment further out.
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 Futurum Research:
MWC23 LV: Nokia Debuts Network as Code To Spur App Innovation
Nokia Dual-Band Massive MIMO Is Key to 5G Performance & Energy Gains
Nokia Brings Fiber Manufacturing to the US to Advance BEAD Vision
Author Information
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.
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.
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