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Introduction

With its Q3 ended October 18, 2012, Nokia (NYSE:NOK) reported dismal results with only a small silver lining. Although its networks business performed well, the telecommunications provider saw significant decline in its Devices and Services division. Nokia is currently restructuring its businesses, but investors should be concerned about falling revenues that outpace the costs cut by the efforts.

Tracking Financials

With Q3 revenue of $7,239 million, Nokia saw a decrease of 19% year-over-year in sales. Although the company established partnerships with many profitable companies, it had a $576 million loss in the third quarter ($71 million loss in Q3 2011). Nokia's operating margin of 1.1% is small, but at least it is positive for the first time in several quarters. This can be attributed to the Nokia Siemens Networks, the largest segment of the company. The division had an outstanding quarter, with record operating margin of 9.2% and sales up 5% from Q2 2012. The Location and Commerce division lost 6% in sequential and year-over-year sales. Internal sales took a bigger hit than external sales, but the unit made headway in establishing a platform product with Amazon and other partners.

In the mobile phones business, sales for the company decreased in several geographical locations, including China, North America, the Middle East, and Africa. Net sales in China fell 78%, and sales volume dropped 57% in North America. Nokia did not reach enough sales of Windows phones to compensate for these losses. Good news for the mobile phones unit, though, was that consumers responded well to Asha full-touch smartphones. The division saw sales growth of 3% to 77 million units, including 6.5 million Asha units. Sales in Asia particularly rose, because Nokia competes in the $100-and-under market with low-end Asha models.

Nokia is currently restructuring its businesses, which led to a significant decrease in cash in the third quarter. In an effort to cut costs and overlapping job functions, the company is laying off employees, canceling certain projects, and shifting to new projects. Although its cash flow was negative $49 million, excluding restructuring costs, this figure is still better than expected.

Immediately following the third quarter report, the stock price fell 3.5% to $2.74. When the earnings report was released, Nokia's stock value was $1.72 per share. Today, the price sits at $2.77 per share, a 61% increase in the third quarter. A boost in government sales led to Motorola earnings that beat analysts' expectations.

As of November 18, 2012, data from Morningstar indicated Nokia's 52-week range varying from $1.63 to $6.69. The company has had dismal growth rates and margins over the last twelve months. Revenue growth has reached a negative mark of -8.9%, and the income growth - also a negative mark of -162.9%. The ROE stands at an astounding -42.7. Nokia's debt looks under control as its debt/equity ratio stands at 0.5 compared with industry average of 2.5. Most financial and stock value indicators look grim for Nokia; the once dominant mobile company has fallen down the order exceptionally fast. However, yield-hungry investors might enjoy extremely high dividend yield of 9.12% for a while.

Future Prospects

In the future, CEO Stephen Elop aims to improve Nokia's competitiveness, increase its financial resources, and provide greater shareholder value in the end. The company expects positive operating margins for the Nokia Siemens Networks in the fourth quarter. However, analysts do not expect the mobile phones business to achieve positive margins next quarter, even though it will release new models during the holiday season.

Elop acknowledged the tough quarter for the Devices and Services division. Although its core offerings suffered, the Devices and Services business cut operating expenses by 19% year-over-year and by 16% sequentially. It also reduced its number of employees to diminish costs further. If Nokia continues to cut expenses at a faster rate than revenues fall, it may return to profitability soon.

In Q3, Nokia announced its innovative new line called Lumia to new markets, including India and Russia. However, the company decreased Lumia prices to clear inventory channels before the next generation of phones emerged. Nokia achieved fewer sales in Q3 than in Q2 overall. Analysts suspect this is due to the release of the Lumia 920, which was highly anticipated by many customers. The excitement surrounding the new phone caused a decrease in the sales of older versions like the Lumia 900 and Lumia 800. Then investors will see the true performance of Nokia and can better predict its overall success or demise.

Bottom Line

In spite of the huge restructuring undertaking at Nokia, the company is nearly finished with these efforts and plans to focus solely on its core operations. With the introduction of new phones, Nokia should see higher earnings for its mobile phones division, which will contribute to greater shareholder value. Thus, I currently consider Nokia a "Hold" option.

Source: Nokia: What Does The Future Hold?