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Reducing Cost Is Important to Nokia’s Profit Margins

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Targeted cost savings of 1.2 billion euros

Nokia (NOK) earlier identified areas to improve efficiency. It expects cost savings of 1.2 billion euros in 2018 compared to its earlier target of 900 million euros. By the end of 3Q16, Nokia had booked 640 million euros out of the 1.2 billion euros. The company expects restructuring-related cash outflows of 1.7 billion euros.

Nokia also narrowed its 2016 Networks operating margin guidance and increased its cost savings goal. It expects its Networks operating margin to be 7.0%–9.0% for 2016 compared to its earlier guidance of more than 7.0%.

Nokia’s revenue has been impacted by slowing mobile broadband spending in 2016. But the company has benefited from a more diversified product portfolio and cost savings from its Alcatel-Lucent acquisition.

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Operating profit in 3Q16

In 3Q16, Nokia generated an operating profit of $55.0 million, compared to an operating profit of $333.0 million in 3Q15. Nokia reported an operating loss of $760.0 million in 2Q16.

A rise in research and development (or R&D) expenses was offset by a higher gross profit for Nokia in 2Q16. In the first nine months of fiscal 2016, Nokia has generated an operating loss compared to an operating profit in the first nine months of fiscal 2015. This was primarily due to an increase in R&D as well as SG&A (selling, general, and administrative) expenses.

A number of companies, including peers such as Europe’s (EFA) Ericsson (ERIC) and Cisco Systems (CSCO) are looking to improve profit margins to offset falling revenue.

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