The Good And The Bad From Nokia's Earnings

| About: Nokia Corporation (NOK)

On Thursday morning, Nokia (NYSE:NOK) announced its quarterly earnings. The main points of the report were already released a couple weeks ago, but it was nice to hear the details as well as the comments of the management. I was also pleased to hear that Nokia is not likely to pay dividends this year even though this particular decision upset many investors. At the end of the day, dividends are a way for companies to share their positive cash flow with their shareholders, but Nokia didn't report a positive cash flow in 2012 - therefore, it shouldn't be paying a dividend for the year.

The most impressive thing from Nokia's earnings report was hearing about the company's cash flow. Even though Nokia spent nearly $2 billion on restructuring costs and another $1 billion on dividends in the year of 2012, the company was able to end the year with gross cash of $13 billion and net cash of $5.7 billion. In the beginning of 2012, many people were saying that Nokia would burn between $1-3 billion of cash every quarter and it would run out of cash before its restructuring efforts were complete. Keep in mind that the company sold some assets and issued some new debt, but Nokia's balance sheet is still impressive after all the things it went through. The company's balance sheet basically says "Nokia is here to stay."

For the last many months, I kept predicting that Nokia would return to profitability either in the later part of 2012 or in the early part of 2013. It seems like this is finally playing out even though it is too early to talk about Nokia's 2013 performance at the moment.

The number of Lumias sold in the quarter was as low as 4.4 million, which is disappointing. This number includes all Lumia models including Lumia 920, Lumia 900, Lumia 820, Lumia 800 and others. On the other hand, we know that part of the problem was on the supply side rather than the demand side, which is more acceptable. This quarter, all Lumia models will be fully available in many markets, and it will be interesting to see how well Nokia is able to sell these devices.

Nokia's low end Asha phones continued to see strong growth, which is impressive. In the last quarter, Asha sales are up from 6.5 million units to 9.3 million units, which represents a growth rate of 43%. Part of this could be due to introducing Asha to new markets as well as the holiday season, but this is still impressive. The Asha phone line is very profitable for Nokia because these phones are very cheap to produce and the margins will improve as more Ashas are being sold. Nokia sees Asha phones as a way to build brand loyalty and the company expects many of the Asha users to upgrade to Lumia within a few years. It will be interesting to see if Asha phones will really have that "foot in the door" effect for Nokia.

While Nokia was able to generate some growth in Europe and North America, it was concerning to see that the company didn't perform that well in Latin America and Asia, where most economic growth will occur in the next decade. The company probably needs to focus more in these areas if it wants to see healthy growth. Historically, Nokia has enjoyed a great brand name in South America and Asia, which will make it easier for the company to regain its glory in these continents if it plays its cards right.

Nokia's mapping business also reported profitability for the last quarter as well as the entire quarter. The company's new mapping product "Here" played a role in this profitability. This product allows phones not using Windows Phone operating system to use Nokia maps. Here also has a number of features regular Nokia Maps application doesn't have such as the ability to add new roads and customize the map.

The biggest surprise for Nokia came from Nokia Siemens Networks which is now the second largest provider in the world in overall wireless broadband and LTE areas. Despite going through a major restructuring and laying off thousands of employees, Nokia Siemens Networks was highly profitable in the year of 2012. Up until this year, many people saw Nokia Siemens Networks as a big drag in front of Nokia, and many people suggested that the company should dump this entity entirely while focusing only on mobile devices and maps. Last summer, one of my articles refuted this idea as I saw NSN as being an important asset for Nokia. Now the business segment looks more promising for Nokia than ever. Nokia can still cut this business unit into many smaller pieces and sell the less profitable pieces, but I don't see the company getting rid of NSN completely anytime soon.

When companies go through major restructuring and lays off thousands of employees at once, the employee morale and employee satisfaction in these companies usually go down sharply. Surprisingly, this didn't happen with Nokia. During the earnings call, Stephen Elop reported that the company administered series of surveys to employees, and the results revealed that the morale and satisfaction of employees have improved a lot since last quarter. I am really impressed with how quickly Mr. Elop was able to change the culture at Nokia.

Overall, Nokia's results were impressive. I was particularly impressed with the performance of Nokia Siemens Networks and the positive cash flow despite spending a lot of money on restructuring efforts. The most concerning areas for me were the low number of Lumia sales, and the company's failure to penetrate into Asian and South American markets in a meaningful way. With the new partnerships Nokia signed in China, things can easily turn around for Nokia in the developing world.

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.