Q1 2013 Earnings Preview: Can Nokia Crush Its Doubters?

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 |  About: Nokia Corporation (NOK)
by: Dividend Pros

Investing in Nokia (NYSE:NOK) stock strongly divides opinion. There are investors who argue that the company is past its time and its Windows Phones cannot compete with the might of Google's (NASDAQ:GOOG) Android and Apple's (NASDAQ:AAPL) iOS. Nokia bears also say that the BlackBerry (NASDAQ:BBRY) 10 OS is the final nail in the coffin for the Finnish phone maker. On the other hand there are bulls who argue that Nokia's Lumia phones offer excellent quality at a good price and are gaining traction in emerging markets, especially China. Bullish investors also point to Nokia's continued dominance in the features phone market as well as the turnaround of the Nokia Siemens Network (NSN) business. Right now, I don't have any position in the stock but the chart looks bullish from a technical point of view and I'll be closely watching the earnings to take a position in the stock to see if the company can prove its doubters wrong. In this article, I will summarize the analysts' estimated for Nokia's upcoming earnings release on Thursday, April 18th, and discuss some of the key metrics that I will be focusing on in the earnings report.

I have summarized the analysts' EPS and revenue estimates in the table below:

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Here are the things I will be looking at in the earnings announcement:

Feature Phone Sales

It is common knowledge that the feature phones market is in decline. Nonetheless, it still remains a massive market, especially in emerging countries, and is Nokia's main stronghold. Unlike the Smart Devices segment, Nokia's Mobile Phones business is still profitable- it earned an 8.2% operating margin in Q4 2012- and helps subsidize the losses from the Smart Devices business. However, this feature phones cash cow is coming under increasing threats. Nokia's feature phones are facing increased competition from entry level Android phones from Chinese OEMs Huawei and ZTE as well as from Indian OEMs Micromax and Karbonn; smartphones produced by Chinese and Indian manufacturers are getting cheaper by the day and are rapidly removing the price incentive to buy a feature phone over a smartphone. Moreover, Nokia's fairly popular and profitable Asha series of feature-smartphones has a new competitor in the newly launched Samsung's (OTC:SSNLF) Rex series which targets the same market segment. Samsung's aggressively marketing and pricing for its Rex phones, especially in Nokia's stronghold India, represents the company's bid to dominate the length and breadth of the global mobile market, and success of the Rex series could accelerate the decline of Nokia's Mobile Phones business segment. Therefore, it would be interesting to see the impact of these unfavorable factors on Nokia's feature phone segment, especially the Asha phones' sales in the earnings report. Signs of resilience in this segment should be seen as bullish for Nokia.

Smart Devices Sales

Nokia understands very well that feature phones are the past and is vying to enter the extremely competitive smartphone market using the Windows Phone platform. Analysts and investors commended Nokia for pulling a major coup by announcing a deal to launch a TD-SCDMA based variant of the premium Lumia 920 with China Mobile, which has the largest subscriber base in the world with more than 700m subscribers, and that too at a heavy subsidy from the carrier. It is important to note that China Mobile still doesn't sell the iPhone, so the Lumia 920T is amongst the top phones offered by the carrier. The global 3G version of the phone is also offered by China Unicom, which is the third largest wireless carrier in the world. The subsidy from China Mobile appears to be working; a recent report from AdDuplex reveals that the Lumia 920 is the most popular Windows Phone in China as well as worldwide, which is a pleasant surprise given the commonly held belief that Nokia is only popular in price-sensitive segments. This can only be good news for Nokia as you would expect the company to enjoy a decent gross margin on this high end phone. This also indicates that the supply constraint concerns that Nokia raised with respect to the Lumia 920 in its Q4 2012 earnings report have eased. Further good news from the AdDuplex report suggests that Nokia is by far the most preferred OEM manufacturer for Windows Phones, owning 80% of the market. Therefore, I expect Nokia to report an improved ASP and an above expectations gross margin on its Smart Devices sales as the sales mix shifts from Symbian to the more profitable Windows Phones, and due to the popularity of the top end Lumia 920 within the Windows Phones mix. Nokia can prove its doubters wrong if it can show good sales numbers, especially from China, along with a healthy gross margin in the earnings report.

While the indications coming from China and Latin America are generally good, things are a lot more uncertain the US. In a recent note to its clients, MKM partners, citing a survey they conducted in the US, reported that less than 1% of the survey respondents intended to buy a Nokia device as their next phone. The survey also showed that Nokia faces a challenge in developing brand awareness, as a large majority of the respondents were still unaware that Nokia offers a Windows 8 Phone. However, I wouldn't take the survey results at face value to be honest given the shabby record of most sell-side analysts. That is why I will pay close attention to the geographical mix of Nokia's sale numbers before making any judgment. Short sellers and critics have been constantly saying that Nokia is finished in the North American region. Therefore, strong sales from this region can potentially crush the shorts.

Nokia Siemens Network

NSN remains the dark horse that most Nokia bears keep ignoring. Since the joint venture was entered into in 2006, NSN has been seen as a distraction from Nokia's core mobile phone business as it struggled to attain sustainable operational profitability in a tough macroeconomic environment. However, NSN has recently turned out to be a bright spot in Nokia's otherwise struggling core business, contributing positively to the bottom line as well as delivering healthy cash flow in Q4 2012. And the prospects for NSN are looking good as it appears to be well positioned for the upcoming 4G LTE rollouts throughout the world. However, Siemens (SI) has been increasingly vocal about getting rid of its stake in the joint venture. Siemens can do this by way of an IPO, a spin-off, or selling its stake to another party (which could be Nokia). In the earnings call, I would expect Nokia's management to comment on how the company sees NSN in its future plans, and I would be disappointed if Nokia decides to get rid of NSN as well.

Conclusion

Nokia has been completely written off by many investors and analysts; however, the noises coming out of China regarding the Nokia Lumia phones, and the surprising strength of NSN shows that Nokia is still very much alive and kicking. Expectations from Nokia's Q1 2013 earnings announcement are not very high, and I believe that better than expected results can crush the doubters, at least for a few weeks. I'll be looking for signs to see that the turnaround is on track before making a decision to buy the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by Dividend Pros' analyst covering technology.