Nokia (NOK) has made a lot of progress the last couple years as it attempts to reinvent itself while it cuts expenses and reigns in spending. The move to focus a lot of its energy on Microsoft Windows phone and OS while introducing the new Lumia 920 series in North America and abroad creates a promising picture. But the company is still struggling and continues to lose money. As an investor, if I were to give Nokia my money I would need to consider its potential, but at the same time take into account some blunders that have appeared over the last couple years.
This first quarter of 2013, Nokia is expecting its Devices & Services (non-IFRS) operating margin to be at 3%. And it is on track to reduce its operating expenses and production overheads by more than $1 billion (EUR) by the end of 2013 as compared to the end of 2011. Unfortunately, the company's net cash and liquid assets decreased by another $1.2 billion (EUR) last quarter (year to year). However we look at it, outlay exceeded income. On the bright side, for the fourth quarter, net cash & liquid assets increased by $796 million (EUR). As an investor, I would expect this though since the fourth quarter is the best selling quarter for phones.
Lower year over year (and sequential) sales in the fourth quarter for devices were lower, but the company attributes this to its divesting of Vertu, a global leader in luxury mobile phones. As part of the transaction, approximately 1,000 employees have transferred with Vertu while Nokia retains a 10% minority shareholding in the company. I know as an investor, the company has been banking on its Windows Phone service portfolio. The divesting of Vertu is another way to reduce expenses and focus more on Windows, so maybe the (year over year) sales this time around wasn't so bad.
China was the biggest disappointment as it saw sales virtually drop off a cliff, regressing by 79% from one year to the next. As an investor, this is a great concern to me. Nokia led the charge of smartphone sales in China and had a 50% market share just a couple years before. As part of its continued makeover into the Windows Phone line, it dumped the Symbian OS and today it barely has a 1% share as many big name carriers like Apple (AAPL), Samsung (GM:SSNLF), and China Wireless have swooped in to stake their claims. It bothers me that the company cannot get the proper order of phones to China in a timely manner. It is not new "news" that only 30k Lumia 920T models were delivered while 90k were ordered. U.S. holiday sales trailed estimates; now am I going to have to experience the same thing in China over its holiday period? It does not sit well with me that I am going to see the same thing happen in the largest handset market in the world. As an investor, what am I supposed to think of management's ability to grow market share. Even if the Lumia 920T is a market stealer, what good does to do if delivery cannot take place? Supply is not meeting the demand in China as some China Mobile outlets do not even expect to receive them until after the Chinese holidays are over. Is this going to let the major rivals chip away at more market share? Supply constraints are holding back sales, how can I invest my money in the company that cannot keep up with demand?
So I ask myself: Should I trust Nokia with my money? When Steven Elop came over from Microsoft (MSFT), he came into a company that was struggling, so he had his challenges. He poured its energies into the Microsoft's OS because the Symbian OS was losing interest in the US and Europe. The U.S. market became the cornerstone of Nokia's interests while the Symbian OS was dropped and huge market shares in China were lost. So sights are set on the U.S. market while the Chinese market grows past all other markets. It surpassed U.S., India, and various western European countries. Yet in North America, the 700,000 handsets sold accounted for a mere 2% of 35 million. Is this a case is misplaced energies? I know I ask this with hindsight, but it would be a real concern for me as an investor.
Do I have faith in Nokia that a new generation of phones being introduced in China like the Lumia 920 & 920T will be able to ride the wave of China's 1.34 billion residents who are seeking an upgrade to move into a third generation mobile network? Nokia has been in the China for 20 years and has an extensive distribution network in place already. But the company cannot let customers down who are interested in the new phones by not being able to deliver them on time.
If it can get its act together, China has great potential for a company like Nokia who already has a foothold in the country. The Lumia is just the model to convince consumers that the company is relevant again. I may also want to consider long term investment because of North American growth potential. Nokia Corp and Siemens (SI) are working together and are known as Nokia Siemens Network and it continues to grow. In the fourth quarter, operating profits grew to $88.1 million from a sultry $1.31 million two years before. After the same manner, fourth quarter revenue grew 30% to $385.4 million from the previous year of $297.2 million. I would also like to just mention that even though growth looks good in North America they are dwarfed by sales in other regions. A slow and steady growth in North America looks promising.
The company still has a huge potential for market share, but it is going to be a battle. Even though 4.4 million Lumia smartphones were sold globally, it is a minimal number compared to the total number of phones sold. As an example, iPhones sold 47.8 million alone. On the one hand I see great potential in China with the reintroduction of the Lumia as a new progressive face of Nokia with a well established network. And the slow steady growth in North American also looks very promising. On the other hand, will management make the right decisions and can they deliver on their promises? These are things I would have to weigh if I were going to give Nokia my money.