Investors weren't sure what to expect following Nokia's (NYSE:NOK) decision to sell its handset business to Microsoft (NASDAQ:MSFT). The deal, which included Nokia's strong patent estate, was for an estimated 5.44 billion euros ($7.2 billion). Some investors were stunned. But this deal was in the works for more than two years. The two companies received regulatory approval, and the deal closed last week.
Neither company disclosed the exact figure of the deal, which, for Nokia, will be adjusted for net working capital and cash earnings. Nokia management, however, did confirmed that factories in India and Korea would not be transferred as part of the deal.
Microsoft, which reported earnings Thursday, said it would target the affordable mobile devices market, which it described as a "$50bn annual opportunity", and deliver "the first mobile experience to the next billion people while introducing Microsoft services to new customers around the world".
For Nokia, the company has seen a faster-than-expected turnaround. Although some were quick to criticize Nokia for seemingly "giving up" on a growing market, Nokia, which now appears leaner, was looking to transform itself. Since the two companies first arrived at the agreement, Nokia stock has soared more than 30%.
What's more, to compete with Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), Nokia has launch a new phone in mainland China called the X-phone. This is Nokia's first device powered by Google's (GOOG, GOOGL) Android platform, the world's leading mobile operating system.
The way I see it; Nokia no longer resembles the same fragmented hardware company that ignored the usability of its software.
When the company reports first-quarter results Tuesday, management will be asked about sales progress for the X-phone and to reveal plans about restructuring initiatives. Although analysts estimates have trickled down over the past three months, the Street seems generally more optimistic than it was several months ago.
On Tuesday, the Street will be looking for Nokia to turn a profit of 4 cents per share, which will reverse a year-ago loss of 3 cents. In terms of revenue, the Street will be looking for $4.01 billion for the quarter. While this will be close to 50% decline year-over-year, let's not forget the adjustment to the handset sale to Microsoft. Last year, Nokia posted revenue of $7.72 billion.
Accordingly, the full-year revenue figure is expected to take a significant hit, down 42% year-over-year to $18.16 billion. This, too, isn't a surprise. Nokia is turning more into a profit machine. Aside from the year-ago loss reversal from 3 cents to a profit of 4 cents, on a full-year basis, the Street projects Nokia to post an 866% surge in profits from 3 cents per share last year to 29 cents.
Of course, this is an anomaly. But I don't point this out to highlight the contrast to the projected revenue decline. Essentially, things may not get back to "normal" for several more quarters. Over the past couple of years, Nokia has been in an extensive cost-cutting mode in an attempt to clean up its books. To that end, the company is no longer strapped for cash. And it now has the flexibility to do just about whatever it wants, including sacrificing near-term margins for market share.
Let's not forget, after spending $2.22 billion to buy the remaining portion of its joint venture with Siemens (SI), called Nokia Siemens Network, or NSN, Nokia now owns 100% of a business that is producing significant cash flow. Recall, NSN kept Nokia afloat as it tried to fix its phone business.
All told, the company continues to do an impressive job of executing the sort of turnaround that many analysts doubted was possible. And with Microsoft now out of the picture, Nokia is in a position to diversify its smartphone market abroad and challenge Apple and Samsung for market share.
With the stock trading right around $7 per share, which is nearly percentage points away from the media target of $7.50, I would be a buyer here ahead of earnings. I believe Nokia may offer an upside surprise for stronger-than-expected X-phone adoption. With ongoing cost-cutting measures, which should add boost to long-term margins, Nokia stock should trade at $10 over the next 12 to 18 months.
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.