Nokia reported on Thursday a 20% jump in group revenue but operating profit fell due to higher costs and competitive pressure at its network division.
The Finnish equipment vendor generated sales of €3.2 billion in the three months to 31 March, compared to €2.7 billion a year earlier. All three businesses – Networks, the Here mapping division, and its patent arm – all reported surging sales. The patent division overtook Here to become the company’s second-biggest revenue contributor, generating sales of €266 million – up 103% on Q1 2014 – to Here’s €261 million.
Networks, which accounts for the lion’s share of group revenue, saw sales grow 15% on-year to €2.7 billion. However, operating profit slumped to €65 million from €179 million, driven by R&D costs, which grew to €504 million from €433 million, and selling, general and admin costs, which grew to €316 million from €293 million.
Gross margin narrowed to 33.6% from 39.6% driven by a sales mix that included a higher proportion of implementation services and a lower proportion of software sales, and stiffening competition.
Networks’ decline in operating profit dragged group operating profit down 2% to €237 million.
"I remain confident that our lean operating model, ongoing focus on cost management, and the current strength of our portfolio will enable us to meet our 2015 goals for Nokia Networks," said Nokia CEO Rajeev Suri, who conceded that profitability at Networks was "unsatisfactory."
For the full year, Nokia expects year-on-year revenue growth for the networks arm, and an operating margin of 8%-11%.
Nokia made headlines in mid-April when it agreed to acquire rival Alcatel-Lucent in an all-stock deal valuing the latter at €15.6 billion, representing a 28% premium on its average share price over the preceding three months.
"The strategic logic of this proposed transaction is strong and we believe that it will provide long term benefits to shareholders of both Nokia and Alcatel-Lucent. We are moving fast on the necessary integration planning, and have already establis hed a structure designed to minimize disruption to our ongoing business," said Suri on Thursday.
However, Alcatel-Lucent’s second-largest shareholder has rejected the offer.
Alcatel-Lucent "is fundamentally undervalued," said Odey Asset Management, in a filing last week with France’s stock market regulator, the Autorite des Marches Financiers (AMF). The company said it has no plans to tender its shares.
Odey’s dissention will not derail the deal though, since the transaction only requires approval from Nokia shareholders and for 50% of Alcatel-Lucent’s shares to be tendered. Odey holds a 5.1% stake in Alcatel-Lucent.
