Last Thursday, Nokia (NYSE:NOK) investors got some news from the company. Revenue dropped by 27% and total sales by 28% from the preceding quarter. At a quick glance, these numbers were disappointing and the fall of Nokia's share price was truly justified. But let's have a deeper look into Nokia's previous reports and try to understand what the future holds, mainly in Q2. This analysis is focused only on Nokia's D&S division.
It's not new for Nokia to post weaker results in Q1 after the holiday season in Q4. Here are the numbers of total sales last year:
This year's 28% drop was relatively identical to last year's 27% drop.
But does this mean Nokia hasn't changed its direction and is still on its way to bankruptcy? Not necessarily. These aren't the only numbers you should look into in a company that's attempting to make a turnaround.
Let's compare the ASP and Gross Profit Margins from last year to current year:
Gross Profit Margin
QoQ change last year
-1.4 % difference
QoQ change this year
+1.2 % difference
The numbers explained: Nokia is selling more high-priced products with more profit than last year. This is mainly because of higher volume in Lumia sales and decline in Symbian sales.
As we saw above, Nokia's sales seem to be in some kind of periodicity. This is what happened last year from Q1 to Q2:
If Nokia follows the trend, its sales volume shouldn't be decreasing in Q2. This forecast will be based on this assumption.
To be able to forecast the Q2 results, we have to have some kind of idea of the future sales, expenses and ASPs. Let's start by breaking the data into pieces, starting with the sales volume:
1. Sales volume
Asha sales decreased from 9.3M to 5.0M in Q1. This was more than the periodic drop characteristic for Nokia. Thus, I expect the Asha sales to decrease even more in Q2. If we compare the total sales numbers, we notice that Asha sales decreased relatively by 24.9% in Q1. By applying the same percentage to the 5.0M sales in Q1, we should be expecting 3.81M Asha sales in Q2.
- Smart Devices
Nokia announced that we should expect to see another 27% or more increase in Lumia sales. This means that the Lumia sales should be at least 7.1 million. That is 1.5 million more than in Q1. In Q1 there were a total of 500,000 Symbian smartphones sold. In Q2 I expect this to drop to 200,000. Thus, the final number for Smart Devices is 7.3 million.
- Mobile Phones (Ashas not included)
The Mobile Phones sector was in-line with the 28% drop, thus I expect it to follow the trend of +1.014% increase in Q2. A total of 50.8 million Mobile Phones were sold in Q1. By applying the +1.014% increase the number for Q2 is 51.5 million.
- Sales in total for Q2
|Ashas||Smart Devices||Mobile Phones||Total|
Thus we get a total of 62.61 million sold devices in Q2. We'll be using these numbers in our calculations. Next, let's assume the ASPs:
- Mobile phones
We saw a decline in Mobile phones' ASP last Thursday from 31 euros to 28 euros (QoQ). This was mainly because of the drop in Asha sales. However, Nokia managed to make profit with the prices provided. But, as every NOK investor should know, this sector is not the one with big money; the real money is in the smartphones business. Thus I wouldn't worry too much about the ASP drop, as I don't see it going much lower from where it is now. The volume drop is the key here, which was in line with the seasonal change. In other words: I don't expect this sector to record losses anytime soon.
- Smart Devices
There were 5.6 million Lumias sold in Q1, while Symbian still had its head up with 500k sold units. The ASP increased from 186 euros to 191 euros (QoQ), which I think will hold in Q2 too, as the cheap Symbian, Lumia 800, 900 and 710 phones are being replaced with newer, low-cost Lumia 520 and 620 phones. We should also see a new flagship Lumia being released. The new flagship is the key for ASP to increase even higher, or lower, if it will be a flop. Only time will tell, so the best guess for now would be to assume the ASP to stay the same as in Q1.
Nokia's goal is to keep expenses under 3 billion euros for the fiscal year of 2013. In Q1, the expenses were 710 million euros. That's slightly less than allowed, if one were to divide expenses equally for each quarter. In Q1 report, Nokia announced that expenses are expected to increase slightly in Q2. This was explained with Lumias and other new devices hitting new markets and with the marketing expenses that come along with that. One has to remember that Nokia is still cutting its non-vital expenses, thus we'll use 750 million euros for Q2.
4. The forecast
With the numbers provided, we are able to calculate the estimate for Q2. To keep this forecast simpler, I am assuming the gross profit margins to stay the same as they were in Q1. We'll also have to count in the approximate quarterly income of 125 million euros from patents. The expenses in Patents may not necessarily be from Patents, but are there to keep the entity data correct.
Gross Profit Margin
These are non-IFRS numbers. As Nokia still has some restructuring bills to pay, we should expect these numbers to drop by a little bit.
Profitability in Smart Devices
To achieve profitability in Smart Devices, Nokia needs to sell around 11 million Lumias per quarter, if the expenses, gross profit margin and ASP stay the same. Nokia should be achieving this by Q4, if the quarterly sales continue to grow by 27%.
But is it possible?
I highly think so. Lumias haven't hit every market yet. Even in Nokia's home country of Finland one can't find Lumia 520 or 720 anywhere. Nokia's promise of +27% Lumia sales for Q2 certainly means something if one can read between the lines. Probability for Nokia meaning that the sales numbers for the just released Lumia 520 and 620 are extremely high, is indeed, extremely high. As Nokia keeps on capturing market share and hitting new markets with its just released phones, it's highly probable for Nokia to make same kind of promise for Q3, too.
Nokia's share price will probably have a storm ahead for the next 3 months. There will be a lot of ups and downs as the market is extremely sensitive when it comes to Nokia. If you're long, you have to keep your head cool and see Nokia as a long-term investment. With Nokia's current pace, profitability in Smart Devices will be achieved in Q4, and only if/when that is achieved it is going to be a smooth ride towards North-East. As for now, just stay cool. Every chance is a new opportunity, as one famous Finnish athlete once said.
Disclosure: I am long NOK. 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.