Nokia (NYSE:NOK) announced solid Q4 2014 results on Thursday, January 29, as the company easily beat market estimates on the back of robust global LTE spending and improved profitability in its Networks business. Networks sales increased by 8% year-over-year (y-o-y) on a constant currency basis to EUR 3.4 billion ($3.85 billion), driven by soaring Mobile Broadband sales which offset weakness in Global Services. In other businesses, the global mapping division HERE saw net sales grow 15% y-o-y to EUR 255 million ($289 million), and the Intellectual Property (IP) licensing division Nokia Technologies reported a 23% y-o-y increase in sales to EUR 149 million ($169 million) on account of higher income from certain licensees including Microsoft (NASDAQ:MSFT). Interestingly, even after the overall strong results, the company’s stock was down about 3% through Thursday on lower than expected sales growth in Nokia Technologies and a smaller dividend payout. ((Q4 2014 Press Release, Nokia, Jan 29 2015))  
Driven by growth across divisions, Nokia’s overall operational sales grew 9% y-o-y to EUR 3.8 billion ($4.3 billion) in the quarter. On the cost side, the adjusted operating margin (non-IFRS) improved by 200 basis points over the prior year quarter and 10 basis points sequentially to 13.8%, owing to some high-margin LTE deployments in the quarter. Looking at its progress in maintaining profitability along with top line gains, the company maintained its operating margin estimate for Networks to be in the range of 8-11% for 2015. For its HERE division, Nokia raised its operating margin estimate from 5-10% to 7-12% for full year 2015 on the back of “positive industry trends” and its own focus on improving cost efficiency.
Our $8 price estimate for Nokia is about in line with the current market price.
Networks Drives Sales, Profitability
The sale of the handset business made Networks (formerly NSN) the biggest contributor to Nokia’s value, accounting for almost half of its total value by our estimates. Before being promoted as Nokia’s CEO, Rajeev Suri headed the Networks division for the company. At the helm of NSN, Suri is credited with turning the division around to sustained profitability on the back of a big restructuring program that cut its operating expenses by EUR 1.35 billion and increased its focus on mobile broadband. However, the transition took a toll on Nokia’s top line, which declined by 17% year-over-year in the first quarter last year as the company exited unprofitable service contracts, primarily in EMEA and Latin America.
In the second quarter, the company reversed much of its top line losses by banking on higher LTE spending across geographies, especially Greater China and Asia-Pacific. Excluding the impact of divestitures, contract exits and currency fluctuations, Nokia’s Q2 Networks revenues actually grew by 1% y-o-y – an improvement over the decline of 6% in the previous quarter and 12% in Q4 2013.
Banking on new contract wins amid rising global LTE spending, the company changed gears in the third quarter with robust 15% y-o-y top line gains in the Networks division, driven by 33% y-o-y sales growth in Mobile Broadband. Networks sales in North America grew 53%, likely due to LTE network deployment by Sprint (NYSE:S), and sales in Greater China improved 38% on increased LTE spending in both Taiwan and China, especially by the world’s largest carrier, China Mobile (NYSE:CHL).
Nokia repeated its strong Networks performance in the fourth quarter with 13% y-o-y growth in Mobile Broadband and a return to positive sales growth in Global Services. Mobile Broadband sales were driven by strong sales growth in North America (95%) and modest growth in Europe, Middle East and Africa. It is important to note that Q4 sales figures show Networks’ strong dependence on developed markets for growth. The company reported y-o-y declines in Networks’ sales in emerging markets such as Greater China and Latin America in the quarter and its growth in other emerging markets such as Vietnam, Myanmar and India was offset by lower network deployment in Japan. There is a need for Nokia to realign its focus on emerging markets considering that markets such as Asia, Africa and Latin America are likely to drive growth in the global telecom industry going forward. Of overall Networks sales of EUR 3.65 billion in Q4 2014, Mobile Broadband contributed 52% of the total against 47% contributed by Global Services.
Going forward, rising 4G LTE deployment activity should help improve revenues further. Nokia has done well in winning LTE contracts with China Mobile and China Telecom, and has emerged as one of the leading foreign players in the Chinese LTE buildout. Although European sales have been slow to recover, the deal pipeline looks strong as carrier spending returns amid improving macroeconomic conditions. In Europe, Nokia won two large LTE contracts with Everything Everywhere and Vodafone, which should help stabilize revenues in the fourth quarter. The company’s contract win at Sprint is also likely to boost revenues in the near term, with the carrier likely to splurge on its Spark program now that its initial LTE layout is complete.
HERE Sales Show Robust Growth
HERE, Nokia’s mapping and location intelligence business, saw operational sales grow by 15% y-o-y on the back of rising sales to automobile customers and higher revenue realization from services offered to Microsoft. Sales to automobile customers represents over 50% of total HERE sales and its growth in the quarter was aided by a 22% rise in sale of map data licenses for the HERE embedded navigation systems.
Nokia has made several interesting deals in the last couple of quarters to make its HERE unit more personalized and intuitive and boost the long term potential of its mapping business. The Finnish company acquired artificial intelligence firm Desti towards the end of May last year and announced its plans to buy predictive analytics company Medio Systems in June. Nokia also launched a $100 million Connected Car Fund around the same time to identify and invest in companies which can help grow HERE’s location and mapping ecosystem in the automotive space.    According to our estimates, HERE currently contributes less than 3% of the company’s valuation but its potential for future growth is immense considering the rising demand and growing penetration of intelligent location and mapping services, especially in autos and smartphones.
Nokia provides its map data to 80% of all car-navigation systems in the world and several major enterprises including Amazon (NASDAQ:AMZN), Yahoo (NASDAQ:YHOO) and Microsoft.  In fact, Microsoft is going to be one of Nokia’s biggest customers in the short to medium term with its four-year licensing deal to use HERE on its mobile devices. We expect the recent acquisitions and investments to help the company lay a solid foundation for its long-term growth and attract customers going forward.Notes:Q4 2014 Presentation, Nokia, Jan 29 2015 [↩]Nokia Q4 2014 Earnings Transcript, Seeking Alpha, Jan 29 2015 [↩]Press Release- Desti Acquisition, Nokia, May 30 2014 [↩]Press Release- $100m fund, Nokia, May 5 2014 [↩]Press Release- Medio Acquisition, Nokia, June 12 2014 [↩]Nokia to Buy Medio for Analytics Data in Map Push Against Google, Bloomberg, June 12 2014 [↩]