Nokia (NOK) reported its much anticipated first quarter earnings, which disappointed some of its investors. As a result, the stock fell over 6% in the Helsinki stock exchange. Despite a decrease in overall losses from the same quarter a year ago, the stock went down as the market was expecting the company to report another profitable quarter. However, as I mentioned in my previous article, the company was able to report profit in the last quarter due to seasonality and increased sales of WP7 phones at discounted prices. On the other hand, for the first quarter of the current year, Nokia faced some supply issues that resulted in lower sales of Lumia 920. Let's look at the performance of the company during the first quarter.
Narrowing Losses not Enough?
First of all, the revenue figures of the company - revenue fell short of the consensus estimates by a substantial margin. The company reported 5.85 billion euros ($7.6 billion) while analysts were expecting the company to report revenue figures of 6.52 billion euros ($8.51 billion). The main reason behind the drop in revenue was a substantial fall in the sales of cheaper mobile phones coupled with the unexpected decrease in sales from Nokia Siemens. For the cheaper phones, the company reported a fall in average selling price and volumes.
On the other hand, Nokia's high-end mobile phone sales improved from the previous quarter. The company sold 5.6 million Lumia handsets, compared to 4.4 million during the last quarter. While 5.6 million units of Lumia are extremely low compared to the volumes of Apple's (AAPL) iPhone and Samsung's (OTC:SSNLF) Galaxy series; it is encouraging for the company that customers are attracted towards its high-end handsets. Sales of Lumia did not beat analyst estimates due to two reasons, in my opinion. First, the company faced some supply issues, which hindered the sales; there is no use of making a brilliant product if you cannot put it on the shelves. However, the supply issues are now resolved and it is unlikely that the company will face such issues again. The second reason in my opinion was BlackBerry's (BBRY) launch of Z10. A significant number of users from different platforms moved to BlackBerry 10, which might have resulted in lower number of customers opting for Lumias.
Moving on to the losses - total losses for the quarter narrowed substantially during the quarter. Nokia's year-ago losses were 928 million euros ($1.21 billion); however, this year, the company reported losses of 272 million euros ($355 million). Finally, the cash position of the company; there have been concerns about the cash position of Nokia as the company has been spending substantial amount of cash on its turnaround efforts. However, Nokia's net cash for the first quarter has actually improved to 4.5 billion euros ($5.87 billion), which is extremely positive for the company.
What does the Future Hold?
Margin estimates for the next quarter have been revised to negative 2% from previous estimates of .1%. Nokia is still selling a lot of phones; however, the number of smartphones is low. In my opinion, second quarter Smartphone sales will be considerably higher than the first quarter due to the launch of cheaper smartphones. Meanwhile, cheaper phone sales for the company will continue to decline, which might hamper the margins in the next quarter.
Going forward, the company should focus on increasing sales of its high-end Lumia devices, which will allow the company to achieve higher margins and higher average selling price. However, it should be kept in mind that competitor pressure for Nokia will remain. Samsung's Galaxy S4 will soon go on sale; BlackBerry's Q10 will also go on sale in different areas this month. Furthermore, Apple will also launch new handset by the mid of the current year. So, the competitive pressure might have played a part in the reduction of margins from devices segment.
What Should the Shareholder Do?
The earnings announcement does not change anything for long-term shareholders, in my opinion. We might see some overreaction from traders; however, the long-term investors should not be spooked. The results are mostly in line with the expectations, and the cash position of the company has actually improved. For a company making a turnaround, it is extremely important to have sufficient cash reserves, and it seems that the company is managing its cash very efficiently.
If you believe in the long-term success of the company, then there might be an opportunity to add some more shares to your position. Earlier, the company announced its plans to launch a number of new handsets during the current year. Looking at the specifications of these new handsets, it is clear that the company is focusing on a wide range of market segments. I expect Nokia to substantially grow its high-end Lumia sales by the end of the year.
Making a turnaround in such a competitive market is a hard job, which should be carried out with patience. Rome was not built in a day; if the strategies are well executed and the company has the products to woo the market, then there is nothing to be worried about. Investors might become deflated and impatient during the process, and some might jump the ship. However, patient investors will be rewarded, in my opinion.
A look at the valuation of the company suggests that the market is being too harsh - the company is valued at a lot less than its total value. Strong cash balances along with a solid asset base are worth more than the value market is putting on these assets. Furthermore, there is a strong portfolio of patents, which will provide substantial cash flows. And finally, Nokia's share in Nokia Siemens is worth between $3.75 billion and $6.5 billion.