Almost a month ago, I wrote an article where I shared my view on what was most likely to happen to Nokia Corporation (NOK), and concluded that it would probably recover by itself. Given the latest quarterly report, is that scenario in question? Well, for me there were two important pieces of data that could have changed my point of view: the levels of cash and the volume of the Lumia devices. Fortunately, both came out without raising some flags.
The company slightly increased revenues from the first quarter, and without extraordinary events delivered earnings per share of €-0,08. It was also clear in the report that the transition from Symbian to Windows Phone is still affecting the company, as the negative operating margin for Devices & Services demonstrates that the decline of the Symbian devices is happening faster than the growth of the Windows Phone. On the positive side, Nokia Siemens Networks returned to operating profitability.
|Reported 1H2012||Non-IFRS 1H2012|
|Net sales millions||€14,896||€14,896|
|Operating results millions||(€2,166)||(€587)|
|Net Income millions||(€3,101)||(€735)|
|Net cash millions||€4,200|
|Total assets millions||€31,313|
|Total equity millions||€10,320|
But right now, the market is more focused on trying to find out if the company will manage to survive until its transformation is complete, and if the Lumia Windows Phone will be widely accepted, even without ever reaching past levels of market share for Nokia.
The levels of cash remain comfortable, with gross cash of €9.4B and net cash of €4.2B, values that are higher than a year ago and include the payment of the annual dividend of €742 million. For the quarter, cash from operating activities was €102 million. Also, Lumia sales increased to 4 million and while it's a small number, it increased quarter-on-quarter and while waiting on Windows Phone 8. Checking the numbers, the performance of the company is consistent with a well managed transition.
So again, the decisive factor is not if the company manages to survive until Windows Phone 8 is introduced, but about the success of the Windows software on its devices. At current valuation, the company is worth €5.46B, slightly more than its current level of net cash. Even if the future Nokia is a fraction of what it was, current prices are attractive.
I believe that Nokia will recover on its own, Microsoft (MSFT) and Nokia need each other and that currently the company is inexpensive. But I also believe that before investing, you should try a Lumia phone and see by yourself if you believe in the product or not. It's not about managing to get there, it's about Lumia and the Microsoft partnership.