NOK Q3 2024: Gross Margin +500bps as Cost Savings Hit €500M
- Strong order intake and backlog momentum: The Q&A highlighted that Nokia's Network Infrastructure order backlog is at a higher level than a year ago with a consistent book-to-bill ratio above 1 for multiple quarters, indicating a solid foundation for future revenue growth.
- Expansion into high-growth non-CSP segments: Executives emphasized increasing exposure to data center opportunities, including key wins like the CoreWeave contract, and a shift towards more profitable non-service provider markets that are likely to boost operating margins.
- Accelerated cost savings and margin improvements: The discussion confirmed rapid execution on the cost savings program and notable gross margin improvements (expanding by around 490–500 basis points), supporting the ability to achieve double-digit operating margins at a lower revenue base in Mobile Networks.
- Slower Conversion of Orders: Despite a consistently high book‐to‐bill ratio and growing order backlog, customers are issuing purchase orders much more slowly due to macroeconomic uncertainty. This delayed conversion could pressure near-term revenue visibility.
- Weakness in the Optical Network Segment: Executives pointed out that the Optical Networks unit continues to underperform—particularly in North America—potentially limiting upside and contributing to overall lower revenue guidance in the Network Infrastructure segment.
- Negative Impact from the AT&T 5G Contract: The accelerated revenue recognition for the AT&T 5G contract in the current period is set to taper off next year, with expected volumes at about half this year's levels, which could weigh on Mobile Networks revenue performance going forward.
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AT&T Impact
Q: How will AT&T 5G volumes change?
A: Management expects that, following a €150 million acceleration this quarter, next year’s volumes from AT&T will be about half of this year’s levels, reflecting a deliberate shift in revenue recognition. -
Mobile Deals
Q: How will new Mobile Networks deals add revenue?
A: While recent wins are promising, management emphasized that additional deals are needed to offset losses—indicating that the current deal flow is a step forward but not yet sufficient. -
Cost Savings
Q: Why not exceed the €1bn savings target?
A: They reported rapid progress with a €500 million run-rate and headcount reductions, aiming for a target range of €800 million to €1.2 billion by end 2026, driven by aggressive cost discipline. -
Order Conversion
Q: Why is NI order conversion slow?
A: Despite a solid order backlog and a book-to-bill above 1, macro uncertainties have slowed purchase orders, though the backlog remains higher than last year. -
Optical vs NA
Q: Why do Optical numbers lag while NA excels?
A: Optical segment weakness reflects broader market challenges, contrasting with strong, double-digit growth in North America—an area poised for improvement with the pending Infinera acquisition. -
CoreWeave Win
Q: How does the CoreWeave win boost AI exposure?
A: The win underscores a strategic push into data center and AI-driven markets, marking a key step away from traditional telco reliance toward expansive non-CSP opportunities. -
Enterprise Growth
Q: What is the outlook for enterprise performance?
A: Although top-line enterprise results were lumpy this year, management noted a turning pipeline and improved non-CSP segment performance that should enhance overall margins in the future. -
API Strategy
Q: What progress has been made on API partnerships?
A: An organic API initiative now includes over 20 partners, supporting a move to fully cloud native networks and promising better automation and cost efficiency. -
NI Order Momentum
Q: How is NI order intake trending?
A: Order intake in Network Infrastructure remains strong with consistent book-to-bill ratios above 1 and rising backlogs, indicating gradual market recovery. -
Cost Base Reset
Q: What impact do one-offs have on EBIT?
A: One-off items are recorded separately and do not affect gross margins while a refreshed cost base aims for double-digit profitability at a lowered revenue target of €9.5 billion. -
Margin Mix
Q: How do enterprise margins compare to telcos?
A: Enterprise deals tend to be more profitable than traditional telco contracts, suggesting that a shift toward non-CSP business will likely improve overall margin profiles. -
CNS Dynamics
Q: Why is CNS overall flat amid 5G growth?
A: Despite healthy growth in 5G core, declines in legacy areas like 3G core are balancing out the gains, leaving CNS top-line performance nearly flat. -
Margin Composition
Q: What drove Q3 gross margin improvement?
A: The improvement was primarily due to positive shifts in product mix, geographic advantages, and cost reductions, while one-off AR adjustments stayed out of margin calculations. -
Org Structure
Q: What are the benefits and risks of current structures?
A: The new siloed approach has boosted speed and agility by allowing independent decision-making, though it requires careful coordination to avoid customer fragmentation. -
India Outlook
Q: What is India’s revenue outlook post-Vodafone deal?
A: After last year’s record growth, management expects India to normalize between €1.5 billion and €2 billion, buoyed by the new Vodafone Idea award. -
India Margins
Q: How do margins in India perform now?
A: Management is pleased with India’s margins, which have developed well and remain competitive compared to other regions. -
Reference Designs
Q: Do similar TCO reference designs exist?
A: Attractive TCO reference designs are available, though most recent deals favor a two-vendor approach rather than relying solely on a single vendor model.
Research analysts covering NOKIA.