Nokia to Regain Profitability During Q4
The first and most relevant take from the update is that Nokia will be profitable during Q4 2012, easily exceeding the $0.06 loss expected by the analysts' consensus. This take results from every area of the company exceeding expectations, from Devices and Services down to Nokia Siemens Networks. Also importantly, Devices and Services itself is expected to turn profitable for Q4, producing income in a range of 0%-2% of revenue. This includes 50 million euros of non-recurring income.
Nokia to Beat Revenue Expectations
Not only did Nokia's divisions all perform better than expected in terms of income, but Nokia is also expecting to significantly beat the revenue expectations for Q4. Revenue consensus is now at $9.9 billion, and the sum of all the divisions Nokia has comes to 3.9+0.3+4.0 billion euros for a total of 8.2 billion euros. At the year-end EUR/USD rate, 1.3228, that comes to $10.85 billion - easily surpassing the $9.9 billion consensus.
Devices and Services Was Particularly Strong
The handset division was particularly strong in Nokia's numbers, going from an expectation of up to a -6% margin to the now-updated 0%-2% range. This was helped both by beating revenue expectations and having lower-than-expected costs. On the revenue side, the Lumia range helped by selling 4.4 million units vs. 2.9 million the quarter before. The Asha range also took off quite well, going from 6.5 million units the quarter before to 9.3 million during Q4 2012.
Overall, Nokia also sold 86.3 million units vs. 77 million the quarter before. Seasonality played a part here.
On the Other Hand...
Although overall, the Lumia sales helped Nokia, it's notable that the full number came to just 4.4 million units. The 2.9 million of the previous quarter were for a doomed, un-upgradeable generation, so the increase seems small and below Street expectations. Although at this point, the Street might be willing to ignore this due to the profitability news, it's likely that the focus will once again return to the Lumia range. Also, Microsoft (NASDAQ:MSFT) is once again faced with seemingly not enough traction on this mobile initiative, even with the year-on-year growth rates seeming healthy.
Finally, Nokia guided toward renewed earnings pressure during Q1 2013. Certainly not as deep as what was expected for Q4 2012, but it's still relevant. Nokia guided the Devices and Services division operating margins again toward a negative 2%, with a range of plus or minus 4%. Also relevant, Nokia Siemens Networks' operating profitability is expected to fall toward 3% plus or minus 4%. This is worse than the previous Q4 guidance (though some of the weakness is seasonal).
Implications for the Long Term
While in the short term, the return to profitability is always to be celebrated, the truth is that the mobile world is slowly moving toward being mostly a smartphone world. In that regard, Nokia's long-term strategy is to put all of its eggs in the Lumia/Microsoft Windows Phone basket. Asha is a stopgap measure to serve the low-end smartphone market, which will experience increasing difficulty in competing with full-featured, low-end Android and Windows Phone devices. Indeed, it might even at some point have to face a low-end iOS device.
Given this perspective, although Nokia's numbers were better than expected, the Lumia numbers were not incredibly outstanding. Going from 2.9 million phones to 4.4 million when fielding a new generation of WP8 phones, and with the 2.9 million number being a depressed number, is not really something to celebrate wildly.
Essentially, while Nokia's regained profitability affords it more time to find the correct path and gives the stock some breathing room, it still does not change the long-term picture drastically enough to become structurally positive on the stock. Put simply, the Lumia numbers show Nokia is still not out of the woods and the stock might grow weaker again because of that realization.
More details can be found in the linked report, as well as the previous iteration. Overall, the report was better than expected and naturally shares of Nokia are reacting favorably. "Profitability" is always a good catalyst. However, not everything is so rosy. Q1 2013 was again predicted to be challenging, and Lumia sales are still tracking rather low. With Nokia's future ultimately hanging on Lumia, this might represent a potential headwind for the stock.