Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) reported solid third quarter results due to strength in its Networks division. In particular, 4G builds in China and for Sprint Corporation (NYSE;S) drove that strength and earnings beat. But the party may be only temporary.
In a report dated Oct. 23, 2014, MKM Partners Managing Director Michael Genovese maintained his Neutral rating but bumped up his price target for Nokia slightly from $8.25 to $9 per share.
Nokia Networks posts strong quarter
The mobile infrastructure company reported a 13% year over year increase in Networks revenues and a 15% sequential increase. Looking ahead to the current quarter though, the analyst thinks Nokia’s revenue growth will be “sub-seasonal” and that its operating margins will be “flattish” with the third quarter.
Next year, he expects capital expenditures on wireless infrastructure to be about flat with this year. He believes more difficult comparisons in the U.S. and China will offset growth in Europe.
Nokia’s earnings by segment
Nokia reported overall revenue of €3.3 billion and earnings of 9 euro cents per share. That was higher than Genovese’s estimate of €3.03 billion and 5 euro cents per share. EBIT was €457 million, compared to his estimate of €334 million.
The company’s Networks margins and revenues beat his estimates, but both metrics for Nokia’s HERE and Technologies segments slightly missed. The wireless infrastructure company expects a year over year and sequential increase in revenue, but it guided for revenue to be less than the typical seasonal amounts because of difficult comparisons.
On the bright side though, Nokia management did increase their full year operating margin guidance to “slightly above 11%.” Previously, they were estimating “at or slightly above the 5% to 10% range.”
Bearish on Nokia’s Technologies division
Analysts who have prevented the bull case for Nokia tend to focus on the Technologies division, which holds the company’s intellectual property. Genovese mostly agrees with that, but he doesn’t think it will move the needle much even though its margins are great, with gross margins at 99% and operating margins at 65%.
He expects the segment to see 22% year over year growth next year, thus rising to €707 million. However, that only adds about $100 million in incremental revenues, which is a revenue growth driver of less than a 1%.