Nokia sees poor demand for telecom equipment in FY18

Due to technology transition, heavy competition from China, and operator consolidation in some countries, the erstwhile mobile handset manufacturer, Nokia Corp (NYSE: NOK) reported a 7% y-o-y decline in the fiscal 2017 third quarter revenue. The non-IFRS operating profit of the company exceeded analysts’ estimates.

However, it was due to a one-time patent dispute settlement payment of €180 million received from LG Electronics. The company also presented a gloomy outlook for the overall telecom equipment market in 2018. Thus, we anticipate the stock to remain bearish in the short-term.

Net sales during the third-quarter declined to €5.537 billion, from €5.596 billion in the similar quarter of fiscal 2016. Non-IFRS profit almost doubled to €514 million, or €0.09 per share in Q3 2017, from €258 million, or €0.04 per share, in the year-ago period. Analysts had expected a revenue of $5 billion for the quarter. Non-IFRS operating profit increased to €668 million in the recent quarter, from €556 million last year, and beat analysts’ estimates. Segment wise, Nokia’s Networks business reported a Q3 2017 revenue of $4.823 billion, down 9% from 5.329 billion in the similar period of 2016.

Nokia

Under the Networks business division, Ultra Broadband Networks revenue plunged 17% y-o-y to $2.099 billion. Global services revenue decreased marginally by 2% to $1.359 billion. IP Networks and Applications revenue fell 4% to $1.365 billion. Nokia Technologies’ revenues jumped 37% y-o-y to $483 million. Under Nokia Technologies division, Group Common and Other revenues were $251 million, a decrease of 15% on a y-o-y basis.

The telecom hardware manufacturers are going through a rough phase as the demand for 2G, 3G, and 4G equipment is on a decline. More worrisome is the fact that the demand for 5G networking equipment is few years away. Notably, the company bought Franco-American rival Alcatel-Lucent for €15.6 billion two years ago.

Nokia said it now expects the global telecom hardware equipment market to decline 4% to 5% in 2017, compared with a previous forecast of a 3% to 5% decline. In 2018, the company expects the market to decline by 2% to 5%. Thus, a decline in third-quarter revenues, increasing competition from Chinese manufacturers, and poor outlook turns Nokia bearish in the short-term.

The stock has broken the 50-day moving average, as shown in the image below. The negative reading of the MACD histogram also confirms bearishness in the scrip. Thus we anticipate a decline in the share price.

To benefit from the short-term decline, we are planning to invest in a put option offered by any of the reputed binary brokers listed on this site. A strike price of about $5 is preferred for the trade. Further, the contract should not expire before November 22.