Nokia revenues drop for 2016 but CEO is upbeat about diversification

The slowdown in the network infrastructure market continue to weigh on the major vendors (except Huawei), despite their intense efforts to diversify their businesses. Nokia reported a 10% decline in full year revenues for 2016, with a 12% dip in the Networks business. Overall, its challenges were less daunting than those highlighted in Ericsson’s recent results, and CEO Rajeev Suri offered an upbeat outlook for 2017, but there are still big hills for the Finnish firm to climb.

Suri acknowledged that he was disappointed by Nokia’s top line results in 2016 but said market conditions were improving for the current year and he expected margins, in particular, to increase. Nokia expects its network revenues to fall by 2.2% this year, because of contraction of carrier spending and falling prices, so these improvements will have to come from the ‘adjacent businesses’ it outlined last year in enterprise, vertical and IoT sectors.

The company’s revenues were €23.95bn ($25.8bn), down 10% on the combined Nokia/ALU figures of 2015.  The largest business, Networks, turned in €21.8bn, down 12% on the previous year, while Nokia Technologies, which includes R&D, patents and other licensing, fell 2% to €1.07bn. Total operating profit was down 25% to €2.17bn.

Suri said in his statement: “While I remain disappointed with our top line development in 2016, we continue to expect our performance to improve in 2017 and see the potential for margin expansion in 2017 and beyond, as market conditions improve and our sales transformation programmes gain further traction.” He also pointed to the transition which Nokia had had to undergo after the acquisition of Alcatel-Lucent, but said that most of the integration challenges were over, while the deal is already improving sales prospects.

For the fourth quarter of 2016, revenue was down 13% year-on-year to €6.72bn, and Networks experienced a sharp decline, from €7.06bn in the year-ago quarter to €6.07bn. Nokia Technologies saw revenue fall even more sharply, by 25% to €309m. Q416 operating income fell 27% to €940m.

Amid all these pressures in the traditional mobile businesses, Nokia is looking to expand in the Internet of Things (IoT) and vertical markets (see separate item on utilities); in software-defined networks; and in webscale service providers. Suri said on the earnings call that one of the firm’s most strategic launches for 2017 would be a new suite of IP routers aimed at cloud and “web-centric” organizations. Although ALU’s IP router family was a jewel of the acquisition, that business has been squeezed by intensifying competition- its sales dropped 12% year-on-year in the fourth quarter to €814m, and 8.4% for the full year, to €2.9bn – and Nokia needs to extend its reach into new sectors. Suri said the webscale segment was an “untapped opportunity”.

“We’ve got traction in optical and a next generation product will allow us to get into routing as well,” he told the analyst call, citing customers’ desire to push convergence between packet and optical layers, particularly as they shift to virtualization and SDN. “There has to be accelerated investment and much of that will come from enterprises and webscale companies.” These two groups were among the ‘adjacent’ target markets which Nokia outlined at its Capital Markets Day last fall, where it will expect to generate growth from 2017 onwards. The ALU purchase has been critical in this respect – analysts estimate that Nokia made about €1bn from enterprise customers last year, about three-quarters of that coming from the former ALU businesses.

Enlarging on the theme of diversification, Suri said Nokia had ended last year having accomplished the shift from being mobile-first to addressing the fixed, mobile and software sectors together, and that it had “solid opportunities to drive higher returns through expansion into new customer segments; with emerging businesses in digital health and digital media; and with greatly expanded patent and brand licensing activities.”

“Our sales pipeline with customers beyond our traditional communication service provider base accelerated over the course of the year; we saw an increasing share of our Networks pipeline coming from opportunities covering products and services from two or more of our business groups; and the potential of cross-selling started to become a reality,” he said.

He concluded: “In short, we ended 2016 positioned well for the future, with well-integrated operations, a powerful end-to-end portfolio and our disciplined operating model still delivering robust results. In addition, we remain in a position of financial strength, with a strong balance sheet and the flexibility to invest in opportunities that we believe will create shareholder value.”

On a Nokia standalone basis (which excludes ALU from the prior-year period), net income of €658m was up 32% year-on-year, on revenue of €6.6bn, up 84% per cent from €3.6bn.