Nokia's Third Quarter: The Good, The Bad And The Ugly

| About: Nokia Corporation (NOK)

On Tuesday, Nokia (NYSE:NOK) announced its results for the third quarter and this article will cover some of the highlights of the announcement.

The company reported a loss of 2 cents per share (or a profit of 1 cent per share in non-IFRS terms). Nokia's overall non-IFRS operating margin was 3.8% which signifies the 5th quarter in a row where this value came out positive.

NSN's non-IFRS operating margin of 8.4% was very strong and impressive. In addition, HERE's non-IFRS operating margin was even higher at 9.5%. The company's mobile phone division's operating margin was -1.6%.

Nokia was able to sell 8.8 million Lumia phones, up 19% from last quarter's 7.4 million units and up 203% from last year's 2.9 million units. Lumia continues to be the fastest growing smartphone in the market, even though this may be irrelevant for Nokia next year, as this line of business will be a part of Microsoft (NASDAQ:MSFT) in 2014 (even though I expect Lumia's growth to slow down significantly when it moves to Microsoft, but this is a discussion for another article). The average sale price of a Lumia was down from $204 to $186 mostly due to the fact that most of the Lumias sold in the quarter were low-end Lumias such as the Lumia 520/521. Meanwhile, Nokia's feature phone volume finally seemed to stabilize. After falling sharply for several quarters in a row, the volume of feature phones was up 6% quarter to quarter as it jumped from 53.7 million to 55.8 million. Nokia's feature phones posted a gross margin of 21.5% and an operating margin of 3.6%. The company's smartphone division posted a gross margin of 16.4% and an operating margin of -17.1% which is worse than last quarter's -14.1%. Maybe Nokia did the right thing by selling this business unit to Microsoft after all.

One metric that will be more relevant to Nokia as we move forward is the company's income from its patent portfolio. In the last quarter, Nokia's patent portfolio income was $201 million. Keep in mind that this number fluctuates widely from quarter to quarter and most analysts expect Nokia to generate between $600 million to $1 billion from its patent portfolio annually.

The company's mapping business HERE's revenues continued to decline in the quarter even though its margins improved nicely. HERE generated $274 million in the quarter, which is down 9% since last quarter and down 20% since last year. Compared to the last quarter, HERE moved from a loss of $115 million to a profit of $18 million.

Nokia Solutions and Networks saw its revenues fall by 7% since last quarter and 26% since last year. This is worrisome even though the business segment's profitability improved significantly. Last quarter, the business segment posted an operating profit of $215 million (or $283 million in non-IFRS terms) which is up from $11 million in the same quarter last year, but down from $238 million (or $421 million in non-IFRS terms) in the last year.

Excluding the acquisition of shares of Siemens (SI) in Nokia Siemens Networks (now known as Nokia Solutions Networks), the company's cash flow was pretty flat in the quarter as a small loss in mobile devices was offset by a small profit in NSN. As of the end of last quarter, the company has a gross cash balance of $12.10 billion and a net cash balance of $3.12 billion. This number will change soon when Microsoft's acquisition of Nokia's mobile phone business is finalized.

Now, let's take a look at how Nokia would have performed without its phone division since that division will not exist moving forward. The "new Nokia" would have generated $3.84 billion in revenues and $434 million in operating income (including the $200 million patent income mentioned above). In non-IFRS terms, this would translate into $510 million in operating profits. Without the mobile phone division, the new Nokia's business will be more cyclical but less seasonal (because it doesn't have to depend on the holiday season for phone sales but it will have to depend on business and government spending). Also, the new Nokia has an operating margin of 11.30%, which is higher than all of Nokia's competition including but not limited to Ericsson, Huawei and Alcatel.

Excluding the lack of profitability in smartphone division (which won't even be relevant in the future) and some fall in NSN revenues (which could be due to anything such as contract cycles) Nokia had a decent quarter. It is too early to put a value tag on the new Nokia but it seems like the company will be just fine without its mobile division. I would like to see Nokia use its mapping division to its full potential though, as the company still hasn't found a way to reliably monetize this business unit.

Disclosure: I am long MSFT. 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.