Nokia's First Quarter, From Bad To Worst

| About: Nokia Corporation (NOK)

Nokia's (NYSE:NOK) Q1 2013 results were out today, and I can't say I am happy or expected what was reported. Main highlights are:

Nokia Group non-IFRS EPS in Q1 2013 was EUR -0.02; reported EPS was EUR -0.07.

  • Nokia Group achieved underlying operating profitability for the third consecutive quarter, with a Q1 non-IFRS operating margin of 3.1%.

  • Devices & Services achieved underlying profitability for the second consecutive quarter, with a Q1 non-IFRS operating margin of 0.1%. Devices & Services benefited from a strong focus on cost as well as the reversal of approximately EUR 50 million of previously recognized inventory related allowances in Q1.

  • Nokia Siemens Networks achieved underlying profitability for the fourth consecutive quarter, with a Q1 non-IFRS operating margin of 7.0%. Nokia Siemens Networks benefited from strong gross margin performance in Q1.

Nokia Group net sales in Q1 2013 were EUR 5.9 billion

  • Devices & Services Q1 net sales decreased 25% quarter-on-quarter to EUR 2.9 billion.

  • Lumia Q1 volumes increased 27% quarter-on-quarter to 5.6 million units, reflecting increasing momentum.

  • Mobile Phones Q1 volumes decreased 30% quarter-on-quarter to 55.8 million units, reflecting competitive industry dynamics and an estimated higher than normal seasonal decline in the market addressable by Mobile Phones.

  • Nokia Siemens Networks net sales decreased 30% quarter-on-quarter to EUR 2.8 billion, reflecting industry seasonality.

Nokia Group net cash higher quarter-on-quarter

  • Nokia Group ends first quarter 2013 with a strong balance sheet and solid cash position. Gross cash was EUR

  • 10.1 billion and net cash was EUR 4.5 billion.

  • Nokia Group strengthened its net cash position by approximately EUR 120 million sequentially

I will tell you what the worst thing about these results are, and it was not the y-o-y figures. My problem with these results are the q-o-q numbers from Q4 2012.

Let me give you some numbers. Group sales for Q1 2013 were 5.85 billion euros. While that figure was -20% y-o-y, it was -27% from the previous quarter.

In the devices and services unit, net sales for the current quarter were 2.9 billion euros, down by -32% from a year ago, but also down by -25% from the previous Q4 2012 when sales came in at 3.85 billion euros.

As for Nokia Siemens Networks, sales were actually down by only 5% from a year ago, but were down by a whopping -30% from the previous quarter!!

I mean what is going on here? Is this company falling apart?

The biggest issue here is not the net loss or the fact that sales came in lower as compared to last year, the biggest problem is the sheer miss on revenue of the current quarter.

Analysts were expecting revenue of 6.55 billion euros and the reported number came in at 5.85 billion euros. I don't know about you, but that's a very big miss in my book.

Also, while the company's flagship Lumia line of phones registered increased sales, that was not enough to make up for the lost revenue of Asha phones -- Nokia, we have a problem.

So what is going on here? Here are some thoughts:

Nokia's results are a proxy for things to come in the smartphone space. These results in a way explain why Apple's (NASDAQ:AAPL) stock has been diving south every day. Get ready for a big Apple miss if you ask me.

Nokia's results might be also a proxy for the world economy. Nokia, even more so than Apple, is an international company. If its sales are that much on the decline, it might say something for the world economy as a whole.

Maybe it has nothing to do with all the above and it might just be that Nokia's Asha phones are eroding faster than anyone anticipated. In addition, with Apple coming up a much cheaper iPhone in several months, consumers will have many more choices in the sub-premium smartphone space.

For example, why would consumers buy a Nokia Asha phone for $150, when they could get a comparable Google (NASDAQ:GOOG) Android phone for the same money? The answer is they don't and they haven't, as Nokia's results show. There is simply no comparison in ecosystems.

Furthermore, when Apple comes up with a $250-$350 iPhone in the next few months, would you buy a Nokia Lumia 620 (it retails for 280 euros in Greece)? Why would you not simply fork out about $50 more and get an Apple device? Better yet, you could get a comparable Sony (NYSE:SNE) Xperia for half the price of the Lumia 820 (retails about 550 euros here in Greece).

What this means is that Nokia is probably destined to compete for the very low end of the market place for some time come. As I see it, for the foreseeable future Nokia will have very little pricing leverage against consumers. Also, either Nokia comes up with some kind of a revolutionary device at a very competitive price, or they will lose their Asian market share to Samsung and all those low-end Chinese Android markers.

And if all that is not enough, why in the world were revenues so low at Nokia Siemens Networks?

As far as the balance sheet is concerned, there was a slight deterioration even on a q-o-q basis. Current assets were fewer by about 1 billion euros while current liabilities were up by several hundred million euros. No big deal, but it is a slight negative.

Bottom line

While Nokia in my mind still has potential, the continuing decline in revenue across all of the company's segments are a wake up call. Unless I see revenue stabilizing (even without profits) I can't find too many reasons to be a buyer of this stock for the long term. There are too many other fish in the water, and BlackBerry (NASDAQ:BBRY) is one of them.

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