Nokia (NOK) announced a mixed set of Q1 2013 results April 18th, as a higher than expected seasonal decline in feature phone demand took the sheen off an otherwise good quarter for the company. The Finnish handset maker saw its feature phone sales decline by almost 25% sequentially as customers in emerging markets increasingly preferred smartphones due to the availability of cheap Android options in the market. On the other hand, Nokia continued to deliver on its Lumia Windows Phone promise, posting unit sales of 5.6 million or a growth of 27% over the seasonally strong holiday quarter.
Lumia’s strong performance improved the mix towards higher-margin phones, helping Nokia overcome the revenue slump to post an underlying profitability in the devices business for the second quarter in a row. The fact that the Lumia numbers in Q1 did not benefit much from sales of the cheaper 520 and 720 models, which were launched towards the end of the quarter, should give investors hope for a much improved Q2.
The overall net cash position also improved by about 120 million euros ($157 million U.S.0 sequentially, helped majorly by cash flows from Nokia’s joint venture with Siemens (SI), Nokia Siemens Networks (NSN). NSN’s revenues were down 5% over the year-ago quarter, but most of the decline was due to planned divestments in non-core businesses and currency fluctuations. More importantly, the venture continued its recent out-performance by delivering underlying operating profit margins of 7% – a big turnaround from the negative 5% margins it had posted a year ago. Having returned cash in six and achieved underlying profitability in four consecutive quarters, NSN has shown that it can exist as an independent entity and could command a good valuation if Nokia looks to sell off its stake in the non-core division. By our estimates, NSN accounts for about 37% of our $4.85 price estimate for Nokia.
Not All Gloom In Emerging Markets
Despite all the good news in the earnings report, Nokia’s stock was punished by more than 11% during the day as the markets continued to fixate on the decline in emerging market sales. In China, for example, Nokia’s revenues from mobile phones declined by more than a half year-over-year. This is a big decline considering that the smartphone market in the country is expanding fast and carriers are transitioning their huge subscriber base to 3G. Most of the decline was however due to an expected decline in Symbian sales and the lack of enough low-end Lumia options in the market to make up for the loss. Still, Nokia managed to increase sales in China by about 20% over the previous quarter, banking on sales of just the high-end 920, 820 and the mid-end 620.
Also, while there is no denying that Nokia’s brand power and popularity exits mostly in the emerging markets, it should be taken into account that Q1′s sales decline mirrors that of last year when Nokia’s mobile phone sales had fallen by over 25% sequentially. In the subsequent quarters, Nokia managed to hold its ground with the launch of Asha full-touch smartphones, which competed effectively against the horde of cheap Android smartphones in emerging markets. With the Asha due for a refresh soon, the trend may repeat again this year. Moreover, there was far more uncertainty then about the viability of Windows Phone as a mobile platform than there is now. Symbian sales were declining fast and Windows Phone was yet to pick up the slack. Now, on the other hand, Symbian has become almost non-existent and sales of Lumia Windows Phones are on the rise. Nokia’s 5.6 million unit sales of Lumia in Q1 2013 is almost thrice the number it had sold during the same period last year.
Moreover, with Q2 expected to benefit from sales of the full range of Lumia smartphones, including the recently launched 520 and 720, Lumia sales in emerging markets will receive a nice flip. Nokia has guided for a growth in excess of 27% for unit sales of Lumia in the June quarter. Where Nokia will be looking to win back market share with the latest Lumias is China, where it has fallen down to seventh due to Symbian’s rapid decline. This quarter will also see Nokia launch a new Lumia device at one of the leading U.S. carriers, probably Verizon (VZ), which will offer it hero status at its stores. North American sales of the Lumia have so far been slow, and Nokia will be looking to reverse that this year as more carriers get access to the so far AT&T (T) exclusive, the Lumia 920. This will also be helped by the fact that supply constraints have eased a lot since the start of the year.
Disclosure: No positions.