No longer weighed down by its devices business, Nokia (NYSE:NOK) cast an optimistic outlook for its 2014 performance, with second-quarter net profit of 2.51 billion euros ($3.38 billion) offering a healthy start.
Having just completed his first quarter as Nokia's CEO and president, Rajeev Suri told analysts during a conference call that the recently ended period was "a very positive quarter for the company." He noted Nokia bought five smaller-sized companies, which were easily assimilated and brought it new technological prowess.
Net profit for Nokia, which sold its ailing handset business to Microsoft in late April for a $4.31 billion gain, was a vast improvement over the Finnish firm's year-earlier loss of $304.49 million. Excluding the gain from the sale and losses from discontinued operations, Nokia reported a $35 million net loss for the second quarter on revenue of $3.96 million.
However, Nokia Networks, which now makes up some 90 percent of Nokia's revenues, saw net sales expand 10 percent sequentially, though they were down 8 percent year-on-year. Adjusting for foreign currency fluctuations and divestments of businesses not consistent with its strategic focus, as well as the exiting of certain customer contracts and countries, year-on-year net sales would have risen 1 percent.
Minus those two factors, Nokia Networks net sales declined year-on-year by 5 percent primarily due to lower net sales in global services, which was partially offset by a 6 percent increase in net sales in mobile broadband. The latter benefitted from strong net sales growth in both LTE and core networks. However, the business continued to suffer from components shortages, which also hampered first-quarter 2014 results.
Suri said Nokia has work ahead to restore the global services business to growth after the company exited numerous contracts over the past two years, but he added that the unit is rebounding, citing as an example managed services. "We can now say Nokia Networks is very much back in the managed services business. We have won 10 new managed services deals this year," he noted.
Regionally, greater China drove up Nokia Networks net sales during the second quarter, growing 18 percent year-on-year thanks to TD-LTE network roll-outs. Sales also rose 5 percent in Asia Pacific due to increases in India and Japan. European operators continued holding onto their purse strings, so year-on-year net sales in that region fell 14 percent.
North American net sales also slid 12 percent from 2013's second quarter, but Suri said he expects accelerated network deployment activity from Sprint (NYSE: S) in particular over coming quarters.
During 2014's second quarter, Nokia Networks achieved strong underlying operating profitability with non-IFRS operating profit of $378.60 million, or 11 percent of net sales, compared to $441.93 million, or 11.8 percent of net sales, a year earlier.
In addition, Nokia lifted its outlook for the networks business through year's end, predicting underlying profitability for the unit will be slightly above the high end of its target range of 5 percent to 10 percent this year. "Networks profitability was above all expectations and, as a cherry on top, they raised the network unit's full-year profitability guidance," said Inderes analyst Mikael Rautanen, who was quoted by Reuters.
Nokia Networks had some 49,700 employees at the end of June, a year-on-year decrease of 800 employees but an increase of 1, 200 employees compared to the end of 2014's first three months.
Jari Honko, portfolio manager at Alandsbanken, also quoted by Reuters, said Nokia's other units--its navigation business HERE and the technologies division, which includes patent licensing--remain "question marks" as they "were not able to report any growth."
Net sales for HERE were $312.56 million, approximately flat year-on-year though up 11 percent sequentially. During the second quarter, HERE sold map data licenses for the embedded navigation systems of 3.3 million new vehicles globally, compared to 2.7 million vehicles a year earlier.
Nokia Technologies' net sales were $198.05 million, up 1 percent year-on-year and 12 percent sequentially, but the improvement was due largely to Microsoft becoming a more significant intellectual property licensee thanks to the sale of the devices business.
Nokia named Ramzi Haidamus, formerly of Dolby Laboratories, as president of Nokia Technologies starting Sept. 3. He will replace Henry Tirri, who was acting head of the business since its formation on May 1. Tirri will become an adviser to Suri on technology issues.
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