Nokia Results: The Good, The Bad And The Ugly

Apr.19.13 | About: Nokia Corporation (NOK)

It's that time of the quarter again and Nokia (NYSE:NOK) announced its quarterly earnings which followed a high volatility in the company's stock price. The results were highly mixed for the short term and somewhat encouraging for the long term. Here is a summary of the good, the bad and the ugly from Nokia's quarter.

The Good

The company was able to announce underlying profit for the third quarter in a row. The operating margin was +3.1% which is positive for the turnaround of Nokia. In the devices and services segment, the operating margin was +0.1%, which was helped by Nokia's cost cutting measures. Nokia Siemens Networks was able to maintain an operating margin of 7.0%, which added to the segment's good performance in the last quarter.

On quarter to quarter basis, Lumia volumes are up by 27% as the company was able to sell 5.6 million Lumias as opposed to 4.4 million Lumias last quarter. Typically, smart phone companies perform better during the fourth quarter of the year because people in the western countries tend to do a lot of holiday shopping during this period. I am glad that Nokia was able to beat its holiday season sales, even though the numbers in the 4th quarter were highly influenced by supply issues. Nokia expects Lumia sales to grow faster in the second quarter than it did in the first quarter. Given that the Lumia sales grew by 27% in the first quarter, we can expect a growth rate of at least 30% in the next quarter, which would take us to 7.3 million Lumias. If the momentum continues on, Nokia may be able to pass 10 million Lumias in the next holiday season which is very encouraging.

Moreover, Nokia was able to increase its cash balance once again. Currently, the company has $13.23 billion in cash as opposed to $12.00 billion. As of right now, Nokia has more cash in the bank than it is worth (i.e., $11.91 billion) in the stock market. Keep in mind that most of Nokia's cash is in euro currency and its dollar value could be influenced by the exchange rates.

Furthermore, Nokia continues to cut expenses in order to improve its margins. Nokia Siemens Networks cut its operating expenses by 18% year-on-year and 9% quarter-on-quarter. HERE cut operating expenses by 11% year-on-year. Mobile phones cut operating expenses by 43% year-on-year and 23% quarter-on-quarter. Finally, the smart phone segment was able to cut operating expenses by 24% year-on-year and 13% quarter-on-quarter. Moving forward, Nokia will have to cut these expenses further in order to maximize its margins.

The Bad

While Nokia was able to sell more Lumias, the company sold far less feature phones in the last quarter compared to the quarter before. The volume of mobile phones sold by Nokia fell by 30%. Furthermore, Nokia Siemens Networks also posted a revenue decline of 30% compared to the last quarter. The company blamed this on seasonality, and we don't know if NSN's revenues peaked during the 4th quarter or not. We will need to wait a few more quarters to see where NSN's "normal" revenue should be in a given quarter because the business segment seems highly volatile even though it is the most profitable part of Nokia at the moment.

In the quarter, Nokia spent $168 million on restructuring efforts of Nokia Siemens Networks, $94 million on restructuring efforts of devices and these items were not included in the company's profitability calculations. This shows that the company's restructuring is still ongoing and it may take a while before the efforts are concluded.

In the next quarter Nokia expects an operating margin between -6% and +2% for its devices and services segment. This will be influenced by the decline of feature phone sales, the never-ending recession in Europe, strong competition from many companies in many countries and ramp up costs related to Lumia phones. Investors were probably hoping to see a better margin guidance in the devices and services segment because the company implied that it would be able to sell at least 7.3 million Lumias in the next quarter. Nokia must expect its feature phone sales to plunge by another 30-40% in the next quarter.

The Ugly

Nokia's mapping and locations product HERE did not perform that well in the quarter. While it is a great product with great prospects, Nokia is having a lot of trouble with monetizing this business segment. In the quarter, HERE's revenue was $283 million which is down from $362 million in the last quarter and $365 million in the same quarter a year ago. HERE competes with Google Maps along with many other products from other companies, but it falls short on the monetizing side. For example, Google Maps generates revenues through advertisement but Nokia makes no mention of whether HERE collects advertisement revenues or not, which many analysts see very negatively. The product should have been much better in terms of generating revenue and profits considering how much Nokia spent on acquiring and maintaining this business segment.

The company's low end Asha phones brought another highly disappointing point to the table. Until this quarter, Asha had been selling like hot cakes, particularly in developing markets like India. I was highly disappointed to see that Asha sales plunged rather than climbing further. Year over year, the volume of Asha fell by 46% to 5 million units. Nokia attributed this fall to competition and market dynamics, but the company should have done a better job of marketing these phones. In the last year, Nokia cut its headcount from 122,148 to 94,317, representing a drop of 22% and this played a major role in the company's cost cutting efforts.

I was also disappointed to see that Nokia's mobile device volume fell sharply in China. At first, I thought the decline was due to the feature phones; however, the company's report specifies that the decline was due to a decline in the volume of smart phones. The company reported that: "In Greater China and Europe the net sales declines were primarily due to our Smart Devices business unit whereas in the Middle East and Africa the net sales decline was primarily due to our Mobile Phones business unit." I thought Nokia's deal with China Mobile was going to add greatly to the company's presence in the Chinese smart phone market and we might not be seeing this. Unfortunately, Nokia didn't break down the number of Lumias sold by country. This is another thing Nokia needs to work on: improving the transparency of its reports.

Conclusion

Nokia's results were highly mixed. There were some good points, some bad points and some ugly points. Obviously the investors didn't take Nokia's results and guidance well even though a lot of negativity was already baked in the company's share price in the recent months. Interestingly enough, investors are bearish on all major smart phone producers at the moment. Apple's (NASDAQ:AAPL) share price has been beaten for a while and same goes with BlackBerry (NASDAQ:BBRY) and Nokia. Even Samsung who is said to be "killing" all these companies trades for a single digit P/E excluding its cash. Investors seem like they don't want to put their money in the smart phone market until the dust settles and we have clean winners and losers. This is a rapidly changing market and by the time we find out who the true winners and losers are, it might be too late to invest in them. The global smart phone market is expected to grow between 200-300% from today until the end of the decade, so it may not be a bad idea to invest in one or two of the smart phone companies. Currently, the profitable smart phone companies trade for single digit P/Es and those that struggle to post a profit trade for their book value. Once people start trusting these companies again, things will be taking off.

Having said that, I continue to hold my Nokia shares and I will continue to write monthly covered calls. I am not too enthusiastic about Nokia's last quarter results (and its guidance for the next quarter), however I believe in the company in the long term.

Disclosure: I am long NOK, AAPL, BBRY. 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.

Additional disclosure: I recently initiated a small long position in BlackBerry.