Nokia’s 2Q17 Rev Decline y-o-y, Issues Downbeat FY17 View

Nokia sign in snow - photo - September 2017Information technology and consumer electronics company Nokia Corp (NYSE: NOK) reported better than anticipated fiscal 2017 second-quarter earnings and revenue, compared with the similar period last year. The company also surpassed the quarterly EBIT estimates of analysts. However, the stock continues to move in a narrow range of $6.15 to $6.25 for the past two weeks. We anticipate a downtrend to begin due to reasons discussed below.

The Finnish company reported second-quarter 2017 net sales of €5.63 billion ($6.18 billion), down 1% from €5.67 billion ($6.31 billion) in the same period of fiscal 2016, but better than Thomson Reuters Consensus estimates of $5.98 billion. Net profit in 2Q17 was €449 million, or €0.08 per share (~$0.09), up 131% from €194 million, or €0.03 per share (~$0.04), in 2Q16, and surpassed Zacks Consensus estimate of $0.04 per share.

Nokia’s business can be divided into three segments: Networks, Technologies, and others.

Under the Networks segment come the Ultra Broadband, Global Services, and IP Networks and Applications divisions. The 5% y-o-y decline to €4.971 billion in Networks revenue was mainly responsible for the poor performance of the company. Both Ultra Broadband and IP Networks and applications reported a 8% and 4% decline in revenue to €2.165 billion and €1.358 billion, respectively.

Nokia’s Technologies segment reported revenues of €369 million, up 90% on a year-on-year basis. Other revenues recorded 2Q17 revenues of €307 million, up 14% from €270 million last year.

Operating profit in the April-June 2017 quarter increased 73% to €574 million, from €332 million in the year-ago period, and surpassed the Wall Street estimates of €447 million.

Adjusted gross margin in the recent quarter was 41.7%, compared with 38.9% in the similar quarter last year. Operating margin for 2Q17 was 10.2%, up 430 basis points from last year’s corresponding quarter. Net cash from operating activities more than doubled to €1.309 billion in Q2 2017, from €616 million in the year-ago period.

During the quarter, Nokia received €1.70 billion from Apple over an intellectual property dispute. Following the upfront cash payment, both companies have agreed that Apple would resume marketing Nokia’s digital health products and also collaborate in digital health initiatives in the future.

The company got access to a larger fixed-line network business through the acquisition of Alcatel-Lucent in a $15.60 billion deal. That made the company less dependent on mobile broadband. Additionally, the company also introduced routers targeting internet companies. Nokia anticipates cost savings of €1.20 billion in fiscal 2018, excluding Nokia Technologies.

The company now anticipates FY17 core (Networks) revenue to decline in the range of 3% to 5%, instead of low-single digit decline anticipated earlier. However, Nokia maintained that it would still realise a segment operating margin of between 8% and 10%. Thus, a decline in quarterly revenue and poor FY17 view is expected to keep the stock bearish in the short-term.

The stock is facing heavy resistance at 6.40 levels. The MACD indicator has moved below the zero line, while the Chaikin money flow histogram has a negative reading. That indicates bearishness in the stock of Nokia. The next support for the stock is at 5.80.

Nokia - Technical Analysis - 4th September 2017

We believe that an investment in a put option would enable us to gain from the impending decline in the stock price. A strike price close to $6.25 and an option expiry date around September 11th would increase the odds of success in the trade.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.