Nokia sees North America sales slump in Q3, but promises faster cost-savings from Alcatel-Lucent deal

Nokia (NYSE:NOK) saw sales in the third quarter slump, driven by a sharp slide in revenue from its core networks business and in North America in particular. However, the vendor also offered good news to its investors with plans to return $4.4 billion (€4 billion) to shareholders. Nokia also noted that its $17.1 billion deal to buy rival Alcatel-Lucent (NYSE: ALU) remains on track and that it now expects to achieve $986 million in cost savings in 2018, a full year earlier than it previously expected.

As part of those synergies, Nokia unveiled a new "capital structure optimization program," which will inevitably entail job cuts. Nokia did not disclose how many jobs it plans to slash, but said it plans to achieve operating costs synergies by streamlining "overlapping products and services, particularly within the planned Mobile Networks business group," making cuts in its regional and sales organizations, slashing overhead costs, "particularly within manufacturing, supply-chain, real estate and information technology," cutting back on "central function and public company costs," and achieving "procurement efficiencies, given the combined company's expanded purchasing power."

The Nokia/Alcatel-Lucent deal is now expected to close in the first quarter of 2016. Nokia received approvals from the French and Chinese governments for the deal earlier this month and now needs the assent of its shareholders.

"Nokia is approaching the opening of its public exchange offer for Alcatel-Lucent securities from a position of strength," Nokia CEO Rajeev Suri, who will lead the combined firm, said in a statement. "We announced strong third quarter results today and raised our outlook for the full year performance of Nokia Networks. I believe that our performance, combined with the announcement of a new capital structure optimization program and accelerated synergy target, will give Alcatel-Lucent shareholders confidence in exchanging their securities for shares of Nokia."

Indeed, Nokia raised its full-year 2015 profitability forecast for the networks unit, which made up 94 percent of the company's reported sales in the quarter (the rest came from Nokia Technologies, the company's patent-licensing and technology development arm). Nokia now expects the networks' unit's operating profit margin will be around or slightly below the high end of its long-term target range of 8 to 11 percent, an improvement from its earlier forecast of a margin around the midpoint of that range.

Overall, in the third quarter Nokia posted sales of around $3.32 billion, down 2 percent year-over-year and down 10 percent from a year ago on a constant currency basis. Nokia reported net profit of $166.5 million for the third quarter, down from the $818 million in the year-ago period, when the company's profit was boosted by a large tax gain.

Nokia's third-quarter operating profit at the networks unit came in at around $428 million, significantly above an average forecast for a profit of $325 million, according to a Reuters poll.

Suri said in a statement that even if he is "not pleased with the overall sales development, our strong profitability is testament to the strength of our operating model. We said earlier in the year that we would redouble our efforts to ensure our cost structure was aligned to market conditions, and the success of those efforts is very clear in our results."

In the company's networks unit, sales slipped 2 percent year-over-year and 11 percent on a constant currency basis, as strong net sales growth in greater China partially offset drops in North America and Europe.

Nokia's networks sales in North America fell 19 percent year-over-year to $406.4 million, primarily driven by lower net sales in mobile broadband gear, which benefitted in the year-ago quarter from "a significant LTE network deployment at a major customer."

A year ago, Nokia was chosen along with Alcatel-Lucent (NYSE: ALU) and Samsung to provide 8T8R radios for Sprint's (NYSE: S) tri-band Spark LTE service. Nokia was also helping T-Mobile US (NYSE:TMUS) enhance and expand its LTE network, which is now largely complete. Nokia said its weaker networks sales in the region were partially offset by growth in global services, "with strength in the systems integration and network implementation business lines."

Rival Ericsson (NASDAQ: ERIC) saw a slowdown of LTE deployments in mainland China in the third quarter, as sales in North East Asia, which includes China, fell 10 percent year-over-year. However, at Nokia, networks sales in greater China actually jumped 27 percent to around $535.7 million.

"It seems China has not had a such a negative effect on Nokia as it did on Ericsson. But this could be just due to timing, with Ericsson's projects with Chinese operators coming to an end while Nokia's continue," Pohjola Bank analyst Hannu Rauhala told Reuters

Meanwhile, Alcatel-Lucent said revenue in the third quarter jumped 5 percent to around $3.76 billion. However, when currency fluctuations were taken out of the equation, revenue actually fell 6 percent, the company said. The firm's adjusted operating income jumped 42 percent to $232 million in the quarter from $186 million a year ago.

Alcatel-Lucent said Wireless Access revenues clocked in at around $1.3 billion, a year-over-year increase of 1 percent at actual rates and a decrease of 13 percent at constant currency rates. Within the company's wireless networks business, the vendor said it saw strong year-over-year and sequential revenue growth in China, and benefited from continued LTE deployments and volume catch-up from the prior quarter.

In North America, which accounted for 41.3 percent of the vendor's total revenue in the third quarter, revenues increased 4 percent at actual rates year-over-year and declined by 13 percent at constant currency rates, as growth in IP platforms and its "resilience" in IP routing was not enough to offset weakness in other businesses, the firm said.  

For more:
- see this Nokia earnings release
- see this Nokia earnings report (PDF)
- see this Nokia deal release
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article
- see this Alcatel-Lucent release
- see this MarketWatch article on Alcatel-Lucent
- see this Reuters article on Alcatel-Lucent

Special Report:  Wireless in the third quarter of 2015

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