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Nokia (NYSE:NOK) today announced its 3rd quarter earnings; the troubled Finnish telecom giant is currently going through a radical transformation. Key investor concerns from these earnings were cash flows, as the company is depending on the Lumia to instigate a comeback. Nokia will launch its Microsoft-powered (NASDAQ:MSFT) WP8 devices by the end of this month. According to the company, it sold 6.3 million smart devices in the quarter; a 37% decline QoQ. The primary reason behind this decline is consumers holding off to for Nokia's WP8 phones. The company achieved operational profitability (1.1% non-IFRS),, which shows that the restructuring efforts are finally paying off. The positives from operational efficiency and the less-than-anticipated decline in Devices & Services revenues strengthen our bullish stance on NOK. Therefore, we are maintaining our buy rating.

3Q2012:

Analysts were expecting a loss of $-0.13 per share for the current quarter, on revenues of $9.03 billion. Today, the company reported higher than expected revenues. Nokia reported its non-IFRS EPS for the quarter at EUR -0.07 ($-0.09) and IFRS EPS at EUR -0.26 ($-0.34). Good news for investors was the improvement in margins. The company has been striving for operational efficiency, and has made major restricting changes, including mass layoffs. According to company disclosures, it has achieved operating profitability with non-IFRS operating margin for the quarter at 1.1%.

Quarter on Quarter:

According to company disclosures, there was a QoQ decline of 4% in sales and a 15% decline in net cash and other liquid assets. The key take away from this analysis is the decline of 38% in unit sales of smartphones. The number of units sold during the quarter was 6.3 million as compared to 10.2 million in the previous quarter (Lumia 2.9m units, down from 4.0m in 2Q). The primary reason for this decline is the slowdown in buying because people are not willing to settle for an outdated Windows 7, and are holding off for WP8-powered devices. The company has made it clear that it will focus on Windows-based devices in the future. This has affected the sales of Symbian OS-based devices. The number of mobile devices sold was up by 4% at 73.5 million.

Year on Year:

As compared to the same quarter last year, there was a 19% decrease in sales. This decrease was driven by a 56% (to $1.3 billion) decline in smart devices and 19% (to $3.1 billion) decline in mobile phones. Overall, there was decrease of 34% in the Device & Services business. Sales of the Nokia Siemens increased by 3% to $4.5 billion, but there was a 6% decline in the Location and Commerce segment. The gross margins for the quarter were lower at 27.5% as compared to 28.1% for the same quarter last quarter. This reduction in gross margin was driven by lower gross margins in Devices & Services and Location & Commerce. The only segment that saw an increase in gross margin was Nokia Siemens; GM increased to 31.9% from 26.6%. The improvement is a result of more focus on Korea and Japan. The impressive performance of this segment has positively impacted cash flows and profitability of the company.

Microsoft Relationship:

Nokia is relying on Microsoft to trigger a turnaround in its fortunes. The launch of HTC and Samsung Windows 8 devices has raised fears among investors that Nokia might end up being sidelined. We have always reiterated that Nokia has been closely linked with the development of the WP8, and other manufacturers have always been Android-based. In response to a question during the conference call, CEO Stephen Elop was pretty confident of a continued relationship with Microsoft. According to him, the relationship with Microsoft is a mutually dependent relationship, as the software giant is dependent on Nokia for location-based services.

Conclusion:

The stock was up 5% in premarket trading after better-than-expected results. Currently its down around 1.5%. The key takeaways from this earning release were the cash situation and increased operational efficiency. The future of the company is tied to Windows 8 and its Lumia series. Stakeholders had doubts whether the company can survive long enough to benefit from the Lumia-triggered rebound. The improvement in operating margins, and with slightly less than expected cash bleed (15%), are good signs. We have already discussed the impact of carrier partnerships on the future of the Lumia series. These earnings are a positive indicator of Nokia's comeback. We stay bullish on Nokia, and believe that the October-end WP8 launch will be a catalyst for stock price movement.

Source: Nokia's Turnaround In Place: Operational Profitability Improved With Better Than Expected Cash Burn