Nokia: Take Home Lessons From The Latest Guidance

| About: Nokia Corporation (NOK)

On Thursday, Nokia (NYSE:NOK) surprised many investors who were long with the company and shocked many investors who were short with the company after it announced that it is likely to print its upcoming quarterly results in "black ink" rather than in "red ink." It's been a while since Nokia was profitable, therefore this is going to surprise a lot of people, including myself, because I wasn't expecting Nokia to announce a profit until the second half of this year.

Just last year, everybody was talking about how Nokia was going to bleed to death as it was running through its cash reserves. Many analysts didn't understand what Nokia was trying to accomplish and what it would take to accomplish this. Many times, analysts just go with the flow rather than actually getting to understand a company. If the sentiment around a company is warm, they talk bullish about that company, and if the general sentiment around a company is cold, they talk bearish about the company.

Let's take a look at Nokia's newly issued guidance and see what it could mean for investors of the company.

First, it looks like the company's cost-cutting measures have been working nicely. For the last year and half, Nokia spent a few billion dollars out of its pocket in order to cut costs, which might sound ironic to some. Due to European employment laws, the company had to pay a lot of money for letting go of a lot of former employees and it had to spend a lot of money for moving its production plants around. Now, the company is starting to see the results of all the work it has done in order to cut costs. Nokia reported that the operating expenses were less than what the company was anticipating them to be.

Second, it looks like Nokia is selling more of the expensive Lumias and less of the cheap Lumias. The company's average phone sale price increased from $201 to $236. This is definitely good news for the company that had trouble with selling its more expensive phones. Over the years, Apple and Samsung were able to claim many of Nokia's high end costumers, and now, it looks like the company is taking some of those customers back.

Third, the real winner of the quarter was Nokia's Asha brand rather than Lumia. The Asha brand is particularly popular in India and it has been selling like hot cakes. With 9.3 million units sold in the last quarter alone, the Asha brand will help Nokia gain a lot of share in the smart phone market.

Fourth, the Nokia-Siemens Network continues to outperform. The business segment posted a 5 percent growth year to year and this resulted in record revenues for it. This is impressive because the Nokia-Siemens Network laid off nearly 20% of its entire workforce from in the last year and it still continues to see revenue growth rather than revenue shrinkage.

Fifth, for the first time ever, Nokia was able to sell more Lumia phones than Symbian phones. As the company continues to distance itself from the dying Symbian operating system, it will have to sell more Windows based phones to make up for the lost revenue. The last quarter was the first time ever Nokia successfully did this.

Sixth, Nokia continues to make money from its patent portfolio. In the last quarter, Research in Motion agreed to pay Nokia a $50 million one-time payment in addition to continued royalty payments. The royalty payments and license fees will continue to be a major income source for Nokia as it collects nearly $1 billion annually from royalties.

Seventh, Nokia's mapping business (as the company calls it Location and Commerce) posted revenue of $440 million which is up 13% since last quarter. The operating margin is expected to be 12%, which is lower than last quarter's operating margin of 14%.

On the other hand, things aren't very rosy for the company at the moment. There is still a lot of work to do and a lot of road to travel for Nokia. I am highly disappointed that the company was able to sell only 4.4 million Lumia devices. This is mostly a result of supply issues rather than demand. However, the company should have done a better job to make sure it provided enough phones for the holiday season which usually signifies a lot of demand for electronic devices. Nokia could have easily sold 6-7 Lumia phones in this holiday season if it had more supplies but this is a missed opportunity now. Hopefully, the company will have better luck in the next holiday season. Also, I am concerned that Nokia expects to have a negative margin for its mapping business in the next quarter. The company's mapping business is one of the most promising things going on in the technology world right now.

In the next couple quarters, Nokia will finalize its restructuring measures and improve its supply lines. As the supplies of Lumias improve, the sales should follow. I'm sure Nokia is already working on its new line of phones as we speak. The company will continue to better itself, better its products and hope for the best. While there is still a lot of work to do, Nokia is on the right path to greatness.

Disclosure: I am long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.